Author Archives: P O Neill

About P O Neill

is Irish and lives in America.

EBA stress tests: sovereign debt is local

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One of the interesting things upon 1st quick read of the European Banking Authority stress tests is the way it downplays the sovereign debt issue:

The data from the sample of 90 banks (Dec. 2010) shows the aggregate exposure-at-default (EAD) Greek sovereign debt outstanding at EUR98.2 bn. Sixty-seven percent of Greek sovereign debt (and 69% of the much smaller Greek interbank position) is in fact held by domestic banks (about 20% refers to loans which are mostly guaranteed by sovereign). The aggregate EAD exposure is EUR52.7 bn for Ireland (61% held domestically) and EUR43.2 bn (63% held domestically) for Portugal. Importantly, EAD exposures are different from similar exposures reported on a gross basis in the disclosure templates …

Given the distribution of the exposures described above, the direct first-order impact, even under harsh scenarios, would primarily be on the home-banks of countries experiencing the most severe widening of credit spreads. In such cases the capital shortfall should be easily covered with credible back stop mechanisms such as the support packages already issued or being defined for Ireland, Portugal and Greece. In this context these countries have announced capital enhancement measures requiring banks to hold capital to a higher level than that used for the EBA’s EU wide stress test. Additional capital strengthening measures have been, and will be, announced to ensure this.

In other words, most of the Greece, Ireland, and Portugal debt is held by domestic banks which is good news for the other EU banks that might otherwise be feared to be sitting on this stuff and thus should be bad news for the domestic banks of these strained sovereigns — but since they are already under official lending programs, these can be tapped to ensure that the domestic banks (and their lenders) don’t lose money.

Leave aside the concern that Exposure at Default is a technical measure that allows some netting of exposures that might not happen as smoothly in practice as on a balance sheet.  Think about the claim that since sovereign debt is domestic, losses can be handled as long as there is an official lending program in place.  Doesn’t that invite attention on countries with lots of domestically held debt, but no program?

We hope to have more when the individual bank results are revealed.  Note also the filename of the EBA document — it includes a “v6” at the end.  That’s a lot of meetings!

Highly leveraged

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A quote from a Wall Street Journal article about the standoff over how soon Lorenzo Bini Smaghi should resign from the ECB board:

“Our understanding is that Mr. Bini Smaghi wants to know where he would work next if he were to voluntarily resign from the ECB,” one French official said.

 Mischievous suggestion: Greek trades unions should send a letter to the IMF, ECB, and European Commission saying that “our understanding is that our members want to know where they would work next if they are to voluntarily accept cuts in their current positions.”  Anyway, it’s good to know that the minds of our European Council betters are on the big issues.

Enter transition, Exit conditions

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Compare and contrast: IMF statement on Egypt —

“A number of fundamental structural reforms, including the transition to a VAT-like consumption tax and reform of the highly inequitable and costly system of subsidies, are needed to improve the efficiency of public spending and help reduce the fiscal deficit in the medium term. We share the government’s view that immediate implementation of such reforms is not feasible in the context of this arrangement as additional preparatory work is needed to ensure that an effective safety net is in place to protect the low income households. The government intends to prepare a road map to facilitate implementation of these reforms in the future.”

IMF statement on Belarus —

“We have also initiated discussions on a possible IMF program. This has only been the beginning of our discussions and we still have a long way to go. We need to have further negotiations on macroeconomic policies. We will also need to agree on structural reforms to improve the efficiency of enterprises and the financial system so that in future growth will be strong and durable. Above all, the authorities have to be committed to macroeconomic stabilization and structural reforms. We will have to agree on strong stabilization and structural measures which would be implemented prior to the program and would demonstrate their commitment.”

To spell it out, Egypt and Belarus are both looking for around US$3 billion.  Egypt gets it with an explicit deferment of structural reforms as long as there is an “action plan.”  Belarus will have to do reforms before there’s a loan.  Does anyone else see a political version of moral hazard here?

The War on Christmas comes early

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Former European Union Commissioner Frits Bolkestein takes to the opinion pages of the Wall Street Journal Europe to decry “Europe’s Cultural Masochism.”  As an aside, and noting that this is indeed the Bolkestein of Frankenstein Directive fame, it now seems quaint to recall the time when the biggest threat to the European Union was seen as foreign plumbers offering cut price services, as opposed to the serial bailout crisis in which the Eurozone now finds itself.  But anyway, excerpting from his main theme of Europe’s cultural self-hatred, we are informed that:

If they have any doubt about the importance of Christianity in contemporary Western life, these non-European Christians need only look to locales such as England’s Oxford. There, in a land with an established Christian church, the municipality has decided to replace Christmas with a “Winter Light Festival.” According to a spokesman, this ensures that equal attention is paid to all religions.

Now if you’re worried that on your next trip to Oxford, the name of Christchurch College will have been blacked out in a wave of hypersensitivity, fear not.  A quick run through the Google reveals that this “Oxford bans Christmas” meme is one that played out 2 years ago, and it wasn’t Oxford council but a council-sponsored charity, and the move was roundly ridiculed by the town’s non-Christian faiths, and anyway everyone was still able to call the Christmas tree a Christmas tree etc etc.

Of course, the broader issues of immigration and European identity are up for grabs, and one suspects a link, though hard to prove, between Europe making the migration valve a little tighter over the last couple of years and a bottling up of tensions in North Africa culminating in the Arab Spring.   But it doesn’t contribute much to such debates to deploy some hoary old chestnuts of the conservative outrage! circuit in lieu of tackling those broader issues.

Shape of next Irish government still unclear

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While it doesn’t compare to the turmoil in the Arab world, Ireland is having its own abrupt political turnover this weekend.  Although the broad outline of the results is clear, confirming a collapse in the vote of the hitherto natural party of government Fianna Fail, there is still significant uncertainty about the seat counts, which in turn will affect the calculations about forming the next government.

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Quote of the Day

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Financial Times news article—

“Real estate development could become a catalyst for emerging from the crisis,” said Yiannis Stournaras, director of IOBE, an Athens think-tank.

That’s the Greek crisis that we’re talking about.  And although suggesting real estate as a path out of crisis sounds like a hair of the dog cure, since real estate didn’t have much to do with Greece getting into crisis, the point has validity. 

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Tunisia

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The developments are too rapid to have much considered to say but it seems clear that there are new features to this uprising.  The role of Wikileaks in showing that the US diplomats didn’t view the political economy of the place much differently than the people in the street.   Nor is this a “colour revolution” of the type from the mid 2000s — it’s not that organized or branded.  And for the first time in a long time, a decision for European and Arab governments about government legitimacy in their own backyard — and how to handle graceful retirement for the former incumbent.  At least two imponderables: the reaction of overseas Tunisians, who would have been forgiven for wondering if things would ever change, and the spillover to Egypt, where some of the political features are similar and succession is already, obliquely, in the air.

Well, that settles it then

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Remarks prepared by European Commission President José Manuel  Barroso for his potentially awkward news conference with Hungarian Prime Minister Viktor Orbán —

Earlier this year, I made clear that it is not only the so-called “federalists” who want to see more economic governance and economic co-ordination in Europe; it is the markets. The markets are demanding more coordination at European level. The markets are sending every day a very clear message that Europe has to work in a more coordinated manner when it comes to economic and financial issues, so it is not a question of utopia or idealism to ask for stronger economic governance and coordination. It is a matter of realism, sound, solid common sense.

Does Mr Barroso really mean to argue that European Union citizens should be willing to surrender more economic autonomy to EU institutions because “the markets” demand it?  You could fry that argument in a referendum, if you had a referendum.