Europe heading into recession

[anonymous-user]

Digga said:

"We need to admit the euro was a mistake". Hungarian central bank governor calls for an exit mechanism

FT: https://www.ft.com/content/35b27568-f734-11e9-bbe1...

It was a mistake for the member states, it did its job for the EU institutions, to force more EU.

[anonymous-user]

Mrr T said:

I agree with you but you keep focusing on the euro zone. The fact is the same problem is facing the US, Japan and the UK.

I am old enough to remember the fight against inflation. Now the problem is no one knows how to create it. Odd world economics.

I don't think you can assume zirp/qe hasn't created inflation or growth without considering where we would have been without it. In a depression/ deflationary spiral I would suggest. Granted the patient can't walk any more but at least they saved his life.

[Digga]

jsf said:

Digga said:

"We need to admit the euro was a mistake". Hungarian central bank governor calls for an exit mechanism

FT: https://www.ft.com/content/35b27568-f734-11e9-bbe1...

It was a mistake for the member states, it did its job for the EU institutions, to force more EU.

Yes and no. Thus far, it has failed to inculcate either pan-European banking integration or fiscal standards.

[stongle]

fblm said:

I don't think you can assume zirp/qe hasn't created inflation or growth without considering where we would have been without it. In a depression/ deflationary spiral I would suggest. Granted the patient can't walk any more but at least they saved his life.

Deutsche confirmed on Friday that IT is coming to pass through negative rates to corporate and HNWI. It's a bit of an admission that NIRP is here to stay AND they cannot afford to absorb it any longer. Adding levy, depositor protection scheme + liability taking operating costs; they'd need to be around -80 (or -0.8%). I still think they will HAVE to subsidise, not passing through full weight. What is going to be quite dangerous / or likely to end up in unintended consequences, is they will put corporates into wholesale markets / Repo. That's one step from increasingly liquidity squeezes and unchecked marurity transformation / balance sheet arbitrage (so we re-run 2008). It's opening the door anyway.

[DeejRC]

Agammemnon said:

DeejRC said:

Easter 2012. It was March or April I think, apols, its a while back.

I gave chapter and verse on it back then. The Euro died. Its dead Dave. This an ex-Euro.

What we have now is no longer The Euro. It is A Euro, Ill give you that, but it is not the same currency at all as prior to Easter 2012.

Could you expand on that, please?

Er...yes and no.

I can’t be arsed doing it properly, we covered it over many posts, weeks, months last time around on at the time.
Headline notes version: The SNB (Swiss National Bank) bailed the Euro out to the tune of *many* Billions at this time. By *many* pick a number which you consider to be large and double it - you will not be far off.
The SNB performed this miraculously benevolent act because A) its the richest institution/strongest currency in the world and B) only an idiot thinks the Swiss have ever done anything benevolent for anybody ever.
It was an act completely and utterly aimed at protecting the Swiss and the Chuff. Oh and making some dosh. Which they did. Apologies, which they allegedly did despite “proving” it cost them an awful lot of money.
The outcome was still a shiny Euro the other side. It was though a very different currency in a very different environment than what had gone in.
Please note the context of my observations here are from the Swiss side, not the pro/cons Euro side. I don’t actually give a monkeys about Draghi.

[stongle]

DeejRC said:

Er...yes and no.

I can’t be arsed doing it properly, we covered it over many posts, weeks, months last time around on at the time.
Headline notes version: The SNB (Swiss National Bank) bailed the Euro out to the tune of *many* Billions at this time. By *many* pick a number which you consider to be large and double it - you will not be far off.
The SNB performed this miraculously benevolent act because A) its the richest institution/strongest currency in the world and B) only an idiot thinks the Swiss have ever done anything benevolent for anybody ever.
It was an act completely and utterly aimed at protecting the Swiss and the Chuff. Oh and making some dosh. Which they did. Apologies, which they allegedly did despite “proving” it cost them an awful lot of money.
The outcome was still a shiny Euro the other side. It was though a very different currency in a very different environment than what had gone in.
Please note the context of my observations here are from the Swiss side, not the pro/cons Euro side. I don’t actually give a monkeys about Draghi.

Funny enough I was in Zurich doing the thank-you dinners when that went down. Despite being A European bank, a lot our funding was coming out of Swiss IBs and Kantonalbanks (sp?). Sent a massive shock through wholesale markets.

The disconnect between how wholesale / interbank and retail needs better education all round. Our UK understanding is frankly piss poor.

[JustALooseScrew]

Without wanting to appear like a brown noser I just want to state again how grateful I am of the posts made on this thread by those in the industry.

I was having a conversation over lunch with the village cafe owner today about my son, and what a problem he is becoming due to (my excuse for him) puberty. Thirteen going on thirty with an arrogance level off the charts.

I mentioned that unlike him [my son] the older I get the more I learn that I really don't know quite as much as I thought I did.

So, ( I know PH hates sentences that start with that word) I just want to reiterate how much I appreciate the time and effort you guys put in to posting on this thread.

Please continue, and I can't be the only person thinking this - it's a fascinating & educational ride.

[Agammemnon]

DeejRC said:

Answers

Thanks both to you & to the others who answered my question.

[anonymous-user]

Digga said:

jsf said:

Digga said:

"We need to admit the euro was a mistake". Hungarian central bank governor calls for an exit mechanism

FT: https://www.ft.com/content/35b27568-f734-11e9-bbe1...

It was a mistake for the member states, it did its job for the EU institutions, to force more EU.

Yes and no. Thus far, it has failed to inculcate either pan-European banking integration or fiscal standards.

I'm referring to the politics, the Euro is a political project designed to force closer integration and a lock in to the EU institutions.

In this respect its working as planned, the fallout on the ground for EU citizens and businesses is of no consequence.

[SpeckledJim]

JustALooseScrew said:

Without wanting to appear like a brown noser I just want to state again how grateful I am of the posts made on this thread by those in the industry.

I was having a conversation over lunch with the village cafe owner today about my son, and what a problem he is becoming due to (my excuse for him) puberty. Thirteen going on thirty with an arrogance level off the charts.

I mentioned that unlike him [my son] the older I get the more I learn that I really don't know quite as much as I thought I did.

So, ( I know PH hates sentences that start with that word) I just want to reiterate how much I appreciate the time and effort you guys put in to posting on this thread.

Please continue, and I can't be the only person thinking this - it's a fascinating & educational ride.

Seconded.

[loafer123]

stongle said:

Deutsche confirmed on Friday that IT is coming to pass through negative rates to corporate and HNWI. It's a bit of an admission that NIRP is here to stay AND they cannot afford to absorb it any longer. Adding levy, depositor protection scheme + liability taking operating costs; they'd need to be around -80 (or -0.8%). I still think they will HAVE to subsidise, not passing through full weight. What is going to be quite dangerous / or likely to end up in unintended consequences, is they will put corporates into wholesale markets / Repo. That's one step from increasingly liquidity squeezes and unchecked marurity transformation / balance sheet arbitrage (so we re-run 2008). It's opening the door anyway.

I can’t imagine that the US will let that support of EU corporates stand...surely, they will argue, that is state support for industry...?

[Digga]

jsf said:

Digga said:

jsf said:

Digga said:

"We need to admit the euro was a mistake". Hungarian central bank governor calls for an exit mechanism

FT: https://www.ft.com/content/35b27568-f734-11e9-bbe1...

It was a mistake for the member states, it did its job for the EU institutions, to force more EU.

Yes and no. Thus far, it has failed to inculcate either pan-European banking integration or fiscal standards.

I'm referring to the politics, the Euro is a political project designed to force closer integration and a lock in to the EU institutions.

In this respect its working as planned, the fallout on the ground for EU citizens and businesses is of no consequence.

Yes, but to integrate fully, this needs the ECB to be the lender of last resort to all Eurzone banks, which themselves need to become truly pan-European. Given the huge resistance from the likes of France and Germany to overseas ownership of 'their' businesses, there's little hope.

The ongoing divergence of fiscal policy further hinders closer integration - it's not practical or possible.

[DeejRC]

stongle said:

DeejRC said:

Er...yes and no.

I can’t be arsed doing it properly, we covered it over many posts, weeks, months last time around on at the time.
Headline notes version: The SNB (Swiss National Bank) bailed the Euro out to the tune of *many* Billions at this time. By *many* pick a number which you consider to be large and double it - you will not be far off.
The SNB performed this miraculously benevolent act because A) its the richest institution/strongest currency in the world and B) only an idiot thinks the Swiss have ever done anything benevolent for anybody ever.
It was an act completely and utterly aimed at protecting the Swiss and the Chuff. Oh and making some dosh. Which they did. Apologies, which they allegedly did despite “proving” it cost them an awful lot of money.
The outcome was still a shiny Euro the other side. It was though a very different currency in a very different environment than what had gone in.
Please note the context of my observations here are from the Swiss side, not the pro/cons Euro side. I don’t actually give a monkeys about Draghi.

Funny enough I was in Zurich doing the thank-you dinners when that went down. Despite being A European bank, a lot our funding was coming out of Swiss IBs and Kantonalbanks (sp?). Sent a massive shock through wholesale markets.

The disconnect between how wholesale / interbank and retail needs better education all round. Our UK understanding is frankly piss poor.

I can't remember now if I was still in Zurich or if I had just finished moving to Bern.
If my memory serves me correctly, I think the floor was breached very briefly twice over the weekend in question. I freely admit my memory may be faulty - I was mostly drunk at the time. Or on a train or plane trying to either get home or to work.

[amgmcqueen]

Do you think we're heading for a monster crash....?

https://www.youtube.com/watch?v=-j_CxQFziFU

[stongle]

loafer123 said:

I can’t imagine that the US will let that support of EU corporates stand...surely, they will argue, that is state support for industry...?

Unlike ECB subsidy for EU banks (tiering)?

Corporates (large) already see negative rates, buts its coming down to balances of around 100k. And is already there in the Netherlands.

You can see the stress it creates on banks, if you have millions of depositors giving you cash for free, but you have to pay someone to borrow it); as a bank you are in a whole world of hurt. Thats why they are only meant to be a short term / interim messure.

If you can't make money lending to normal good credit customers; guess what they start doing - cheap loans to bad credit. Even Greece is in the negative yield club these days. Its a double whammy, as the banks are also having to undertake capital building exercises, post crisis.

The problem Europe has, the ECB has pumped huge sums of money into the system to prop up inflation; but people are giving to the banks; whom are giving it back to the ECB. Oh dear. Monetary policy misfire.

What the corporates are starting to realise is that rather than depot cash with a bank, they enter into a repo agreement. They lend the cash to a bank, but take collateral in return. Depending on the grade of collateral, they may achieve a better (or worse) deposit rate. Taking unrated Convertible Bonds as collateral will probably see you ONLY pay -30bps to lend EUR. As oppossed to the deposit only cost of -60+

Hence its entirely possible to pay less to lend EUR to a bank AND receive collateral THAN to be an unsecured creditor (and you get bailed in).

Thats a weird one.

It gets weirder when you see US banks willing to pay more to offload EURs than the European banks. But in reality, they are buying / renting balance sheet (its a Leverage ratio arbitrage as the EC has set lowest capital standards on the planet). And through the magic of layering, a lot of that ends up in the ECB. Oh dear. Major Monetary Policy misfire. Goldman's pissing themselves laughing.

[bucksmanuk]

I can’t help but think that there are a number of peoples at the top of these institutions mentioned (EU, ECB, IMF etc…) who don’t really understand what they are doing. Am I being too cynical?
I’ve said it before, please keep posting.

[Mrr T]

stongle said:

What the corporates are starting to realise is that rather than depot cash with a bank, they enter into a repo agreement. They lend the cash to a bank, but take collateral in return. Depending on the grade of collateral, they may achieve a better (or worse) deposit rate.

I know people in corporate treasury and they discovered repo some years ago. They also have risk committees which will not allow them to take low grade collateral. My experience is corporate treasury is very risk adverse.

Corporates do not worry if cash has negative rates because the effect on profits is minimal. Cash for a corporate is a tool to manage its real activities not a business itself.

[stongle]

Mrr T said:

stongle said:

What the corporates are starting to realise is that rather than depot cash with a bank, they enter into a repo agreement. They lend the cash to a bank, but take collateral in return. Depending on the grade of collateral, they may achieve a better (or worse) deposit rate.

I know people in corporate treasury and they discovered repo some years ago. They also have risk committees which will not allow them to take low grade collateral. My experience is corporate treasury is very risk adverse.

Corporates do not worry if cash has negative rates because the effect on profits is minimal. Cash for a corporate is a tool to manage its real activities not a business itself.

In the UK yes, but I did the first Equity Tri-party Repo trade with an EU Corporate; and the schedules I devised are still in major usage. I think usage will only expand. I know of EU corporates (very large); that are willing to accept Mutual Fund collateral - as it's a backstop to bank risk. There was a massive push into this market around 6 years ago when Corporate Repo was made levy exempt (guess where the banks shifted their funding packets). The spivy sales people are very persuasive. It really depends on the scale and sophistication of the treasury unit - but they are getting a lot of displaced bankers turning up there. Peer to Peer or buyside repo has been talked up / in genesis for years. I think it will eventually break into the mainstream - or be scaled in bank to client operation. Remember it has very positive NSFR (Net Stable Funding Ratio benefit). Me think's you are a bit short on trading / regulatory math AND long on relationship / bank service businesses. It's not to say it's not valuable (as it is in asset servicing); but it's not relevent into how monetary transmission works; or banks in post crisis mode. Repo is about a $9trillion market, there is probably another 1-2trillion in off balance sheet funding structures were banks / buy-side firms are engaged in regulatory arbitrage or testing the amorphous post BASEL boundries.

In this market are a mix of oil companies, motor manufacturers, airlines, distribution / delivery companies. They are not doing it to make money; but save it. If you are sitting on a lot of cash or development finance; they can save 100's of k, possibly millions.

Edited by stongle on Tuesday 5th November 13:47

[stongle]

bucksmanuk said:

I can’t help but think that there are a number of peoples at the top of these institutions mentioned (EU, ECB, IMF etc…) who don’t really understand what they are doing. Am I being too cynical?
I’ve said it before, please keep posting.

Not cyncal, it's the reality. A maxim, that gets touted often is "there is no first mover advantage to regulatory change".

Regulatory change "might" be agreed at the G20, but implememntation is left to local regulators to interepret and deliver. Its starts to diverge.

After years of debate, what looks like a consensus model (at the G20); is blown wide apart by local implementation.

If you are late to adopt a regulation, or not seeing increased capital / liquidity / risk costs; others whom do see regulatory costs will buy capacity of you - in size.

Here's a very simplistic (and for forum brevity) example of how one of the BASEL rules - Supplemental Leverage Ratio, was uneven:

In Europe, there is a 3% floor on capital for leverage ratio; in US banks it's closer to 7%. This means, for every $1bn of balance sheet (or loans the bank has made - in whatever form); you need to hold $30m in Capital in a Euro bank or $70m in a US bank (capital is your loss absorption buffer). if you have a 12.5% equity cost (or hurdle rate) - it costs a European bank $3.75m to run a $1bn of balance sheet, US bank $8.75m. US banks will look to offload their balance sheets into European banks - but retain the performance of their investments. There are various mechanisms for this; but what happens is US banks pay more for European bank balance sheet than the EU banks can get locally or by lending EUR in the zone...

In general the EC takes a very soft line with it's banks; if they took full weight of the BASEL regs or a more risk adverse intrepetation; their banks are in trouble; and many likely dead. They wouldnt be able to survve. The ECB already bent it's own rules to keep Monte Del Paschi afloat (see link a few pages back).

It's not just capital, it's liquidity, funding and tax capacity. European banks have made billions renting out / taking a fee for their tax capacity or ability to receive gross dividends to US banks and other offshore firms. There is a tax trial ongoing in Cologne right now, where numerous London based traders generated over EUR60bn of tax advantage (or denied tax receipts) to various EU tax agencies.

Over time these arbitrage trades close (the tax ones are); but whenever there is a disparity between bank costs; someone is going to trade it. In other "wheezes", we realised that Bank of New York was providing OR allowing free intraday liquidity facilities to the repo funding markets. If I was getting hit or called for margin; I could empty out all my collateral at Bank of New York (despite having obligations); and replace it at end of day (so technically was fully exposed there). I should have run about $1bn buffer, but that would have had reduced my leverage capacity and cost millions to fund.

OK, this is a global racket, but Europe has a particular problem,as the entire EUzone is sick / fractured. The ECB is really a very young regulator and isn't set-up for being gamed constantly. The EC, makes very, very poor decisions WRT to financial regulations - particularly as it's HIGHLY protectionist. They need federalisation to save themselves..

I'm probably going to hell......

Edited by stongle on Tuesday 5th November 13:51

[anonymous-user]

^ Well explained. (As an aside, am I right in assuming the equity return acceptable to a US bank is considerably higher than EU making the relative balance sheet cost even wider than your example?)