Not a good day for Germany
Jul. 26th, 2010 01:23 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThe myth of German organization took another hammering at the weekend with the deaths at the Love Parade in Duisberg. One thing that seems plain from this is that various schemes to save on the cost of running the event were a factor in the deaths occurring. Photographs of the entrances and exit make it plain that the arena wasn't suitable for the number of people anticipated, let alone the number of people that turned up.
Meanwhile in the land of economics it was revealed that six of the 14 stress-tested German banks have failed to fulfil a previous agreement that they would publish full details of their sovereign debt holdings.
The "stress tests" assumed that sovereign debt wouldn't default, an analysis that some might find optimistic, particularly with regards to Greece, Italy, Spain, Portugal and Ireland (FWIW, roughly in that order in the Birks estimation of things, but I'll come back to that). It's also a standing joke that the German banks bought the Greek sovereign debt so that the Greek consumers could buy the German goods so that the German companies could book higher profits and thus keep the German banks in "profit". It would now appear that the German banks are a mite embarrassed to admit exactly how much they lent to Greece in order to support the German economy by proxy for nearly a decade.
Spain, to give them credit, comes out of this significantly better than the headlines would appear to indicate. Five of the seven banks that failed the stress tests were Spanish. But, and this is the important thing, the Spanish were far more diligent in testing their banks. Rather than just take the biggest 50%, Spain took about 95% of its financial institutions and tested them. Little surprise, therefore, that it came out with a higher proportion of failures. It would have been nice if all of the other countries had taken as diligent approach as did Spain.
The german pullback indicates once again that anyone who imagines that this is a "European Union" response is in la-la land. BaFin (the German financial regulator) and the central Bundesbank "suddenly realized" that they could not compel banks to publish these details because of the law od the local Landt.
So much for convergence of financial regulation. In Germany there's not even convergence within the country.
In one sense the stress test is complete bollocks -- I reckon that a good 10% of European banks are technically insolvent. But in another sense it's rather encouraging. Because, even if Greece does default. In fact even if more than one European country defaults, the "insolvency" of those banks need not lead to systemic crisis. There are two reasons for this.
(1) If the banks fail, well, the banks fail. They have failed before, and countries can come to the rescue by issuing sovereign debt to, yes, the surviving banks, who would take that debt because all of a sudden there's extra business to be had from the failed banks. It's a circular and illogical argument, but, like a bumblebee flying, it shouldn't work, yet it does
(2) If the governments decide (wrongly, in my view) that the banks can't fail, then it's still not the end of the world, because technical insolvency is not the same as running out of cash. Indeed, if you took the worst of most worlds viewpoint, and assumed wide-ranging default on sovereign debt on a scale equal to Latin America a couple of decades ago, the banks could keep going with horrifically low Tier 1 capital ratios, providing customer confidence remains.
Now,this would not be the same as a threatened Northern Rock collapse. This would be virtually the entire banking system. And I don't think the public is quite prepared to throw in the towel and say "that's it, the banking system is broken, I'm moving over to cash". For a start, the cash is just an IOU from the government, so it doesn't really solve the problem if your confidence has fallen that low. And for a second, banking permeates our everyday life far more than it did 70 or so years ago. So the mass population is likely to partake of the self-delusion that the banks will survive, and that mass self-delusion will, paradoxically, help the system to survive.
That doesn't solve the long-term problem of getting back to half-way sensible liquidity ratios while at the same time getting lending going again to SMEs. It's an absolute "I wouldn't start from here" scenario. As was observed in the Sunday Times yesterday, QE has not increased banks' lending to SMEs. What it has done is make capital-raising easier for listed companies and those looking for private equity. QE, it turns out, is a gift for larger companies and no good at all for smaller and medium-sized ones, because the money has been channeled into the capital markets rather than into bank lending.
In hindsight, this was obvious, but I didn't see it at the time (although I did buy equities, so I suppose I did gain from it). What is not obvious is what macro-economic weapon is available that will get funds to SMEs rather than to the larger operations.
____________________________
Meanwhile in the land of economics it was revealed that six of the 14 stress-tested German banks have failed to fulfil a previous agreement that they would publish full details of their sovereign debt holdings.
The "stress tests" assumed that sovereign debt wouldn't default, an analysis that some might find optimistic, particularly with regards to Greece, Italy, Spain, Portugal and Ireland (FWIW, roughly in that order in the Birks estimation of things, but I'll come back to that). It's also a standing joke that the German banks bought the Greek sovereign debt so that the Greek consumers could buy the German goods so that the German companies could book higher profits and thus keep the German banks in "profit". It would now appear that the German banks are a mite embarrassed to admit exactly how much they lent to Greece in order to support the German economy by proxy for nearly a decade.
Spain, to give them credit, comes out of this significantly better than the headlines would appear to indicate. Five of the seven banks that failed the stress tests were Spanish. But, and this is the important thing, the Spanish were far more diligent in testing their banks. Rather than just take the biggest 50%, Spain took about 95% of its financial institutions and tested them. Little surprise, therefore, that it came out with a higher proportion of failures. It would have been nice if all of the other countries had taken as diligent approach as did Spain.
The german pullback indicates once again that anyone who imagines that this is a "European Union" response is in la-la land. BaFin (the German financial regulator) and the central Bundesbank "suddenly realized" that they could not compel banks to publish these details because of the law od the local Landt.
So much for convergence of financial regulation. In Germany there's not even convergence within the country.
In one sense the stress test is complete bollocks -- I reckon that a good 10% of European banks are technically insolvent. But in another sense it's rather encouraging. Because, even if Greece does default. In fact even if more than one European country defaults, the "insolvency" of those banks need not lead to systemic crisis. There are two reasons for this.
(1) If the banks fail, well, the banks fail. They have failed before, and countries can come to the rescue by issuing sovereign debt to, yes, the surviving banks, who would take that debt because all of a sudden there's extra business to be had from the failed banks. It's a circular and illogical argument, but, like a bumblebee flying, it shouldn't work, yet it does
(2) If the governments decide (wrongly, in my view) that the banks can't fail, then it's still not the end of the world, because technical insolvency is not the same as running out of cash. Indeed, if you took the worst of most worlds viewpoint, and assumed wide-ranging default on sovereign debt on a scale equal to Latin America a couple of decades ago, the banks could keep going with horrifically low Tier 1 capital ratios, providing customer confidence remains.
Now,this would not be the same as a threatened Northern Rock collapse. This would be virtually the entire banking system. And I don't think the public is quite prepared to throw in the towel and say "that's it, the banking system is broken, I'm moving over to cash". For a start, the cash is just an IOU from the government, so it doesn't really solve the problem if your confidence has fallen that low. And for a second, banking permeates our everyday life far more than it did 70 or so years ago. So the mass population is likely to partake of the self-delusion that the banks will survive, and that mass self-delusion will, paradoxically, help the system to survive.
That doesn't solve the long-term problem of getting back to half-way sensible liquidity ratios while at the same time getting lending going again to SMEs. It's an absolute "I wouldn't start from here" scenario. As was observed in the Sunday Times yesterday, QE has not increased banks' lending to SMEs. What it has done is make capital-raising easier for listed companies and those looking for private equity. QE, it turns out, is a gift for larger companies and no good at all for smaller and medium-sized ones, because the money has been channeled into the capital markets rather than into bank lending.
In hindsight, this was obvious, but I didn't see it at the time (although I did buy equities, so I suppose I did gain from it). What is not obvious is what macro-economic weapon is available that will get funds to SMEs rather than to the larger operations.
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no subject
Date: 2010-07-26 01:01 pm (UTC)no subject
Date: 2010-07-26 01:08 pm (UTC)no subject
Date: 2010-07-27 10:19 am (UTC)no subject
Date: 2010-07-27 11:04 am (UTC)However, it's much more complex than that. I said early on that I thought one way through the morass would be to change the rules. I also continue to believe that inflation will result and that the 'solution' will be a transfer of wealth from savers to borrowers. However, that day of reckoning has not yet arrived because the impact of QE has been slightly askew from that which I imagined. That enables interest rates to be kept lower for longer.
But there will still be a day of reckoning, I feel, and the reckoning will be political rather than economic. The numbers, as it were, still don't add up.
A quick look at P1 of the FT Companies & Markets section today gives us a sign of some of the stuff to come. Connaught is in big trouble. Other companies that rely on public-spending largesse are facing similar problems. The unions'/lobbying groups' demands that we basically just deploy a Keynesian solution of employing lots of useless people to do unproductive stuff is little more than what Greece has done for a decade, and look where it got them. If we employed lots of non-useless people to do useful stuff, such as rebuilding the UK's infrastructure, then eventually the benefit would be gained.
Will there be an apocalypse? Perhaps not. But I still think that the current situation is a short-term period of feeling good before ome more bad times. The point I was addressing was that, in the long run we are all dead. So how long does a short-term period of feeling good have to be before it can be called "genuine" rather than a "false dawn"? That is, I guess, a subjective definition.
So, I still think that the banks are insolvent, but I'm now leaning more to the possibility that the system will survive without a banking apocalypse.
I also still think that quite a few countries are insolvent, but it's possible, just possible, that the countries will also survive without default, simply by changing the rules.
Maybe another "temporary" solution will come out that will keep us going for another decade. In a way, this is the answer propounded in Capitalism 4.0. Yes, the system is fucked, but capitalism survives.
The flaw in this argument, I feel is that, sometimes, it doesn't. And the Two World Wars last century are testimony to an example where capitalism most definitely did not "muddle through".
PJ