The existence of capital controls eliminates contagion and makes it possible to bail-in deposits that would normally be considered to have systemic consequences. The more I look at it, the less benign this bailout deal appears. Indeed it looks to me as if it was set up to do considerable damage to the Greek economy. Once this becomes apparent, Greeks are surely likely to change their minds about staying in the Euro.
There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
Themes for today
Emerging market political risk is now front and center.
US data suggests consumption growth is vulnerable to poor wage trends.
The European periphery banks are benefitting from lower sovereign yields.
The potential for China’s currency regime to change is a developing story.
While JPMorgan’s Loan to deposit ratio is particularly low, the bank is by no means unique. LTD in the US is at the lows not seen in decades. On an absolute basis the gap between deposits and loans is now at some $2.4 trillion and growing. This divergence seems completely unique to the post-financial crisis environment.
Credit underwriters pride themselves in their ability to cut lending when they sense that economic fundamentals have changed for the worse. For example one often hears bankers talking about passing on deals in 2007 because of “not liking the fundamentals” or “the markets looked stretched”. But historical data suggests otherwise.
European banks continue to be engaged in deleveraging. It is partly driven by new capital requirements and partly by preparing for the next year’s ECB’s asset quality review and stress test. The deleveraging process includes reducing assets and boosting regulatory capital. Italian and Spanish officials are finding creative ways to help the banks.
Yesterday the European Central Bank cut the interest rate on its main refinancing operations by 25 basis points to a record low 0.25%. It also cut the rate on the marginal lending facility by 25 basis points to 0.75%. The news was unexpected but welcome given the economic outlook in the periphery and the spectre of deflation. However, in Germany, the news was received with fear about bubbles in housing and the stock market.
The Eurozone’s banks are continuing to deleverage, with total loan balances to euro area residents now at the lowest level in 5 years. What makes the situation even more troubling is that many Eurozone banks banks are repeating the Japanese experience of the 90s. They are carrying poor quality and often deteriorating assets on their balance sheets, refusing to take writedowns that will require recapitalization.
In the links today, the biggest threads outside of the NSA scandal were on Greece and Europe. I believe the economy there is bottoming and I want to discuss some of the news flow. There was also a rate decision by the Japanese central bank that was met with disappointment. Let’s put this into context regarding the viability of Abenomics.
Europe has been postponing the recapitalisation of its banking sector. This column argues that it has been doing so for far too long. Without such a recapitalisation, the danger is that economic stagnation will continue for a long period, thereby putting Europe on a course towards Japanese-style inertia and the proliferation of zombie banks.
Back to the Willem Buiter interview in Financiëele Dagblad. Here Buiter continues with some comments on Jeroen Dijsselbloem’s admission that bail-ins will be the preferred vehicle for conducting rescues going forward so as not to burden the public balance sheet.
It’s Easter weekend here in Germany and I caught this interview with Willem Buiter from the Financiëele Dagblad that I get by e-mail each morning. I thought it was significant enough that I would translate it. Buiter has been fairly pessimistic about the future integrity of the euro zone and thinks that some of the euro members are destined to leave the euro area.