As a long-time market researcher in one of my previous existences, I know as well as anyone that research is largely about discerning when people are lying. We all lie all the time – sometimes through embarrassment, sometimes to spare feelings, and sometimes to steer people off the scent. The following is a quote from the conclusions of the latest Bank of England systemic risk survey:
‘Risk managers at big banks, hedge funds, insurers and asset managers said that a sovereign debt crisis in the eurozone and a downturn in the global or UK economy led the list of threats.’
This particular whopper comes under Category 3 above. The trouble is, if you ask an abuser, “So then, how many times a week are you beating your wife these days?”, I can pretty much guarantee the answer will be untruthful. Asking a bunch of villains if they had anything to do with a piece of villainy is likely to get the same result. But in the financial system, establishing the presence of guilty DNA now is almost impossible. The Hedge Funds (and braindead technologists) have seen to that.
The real, empirical answer to any question about threats to prosperity from here on is “banks falling over”. Sovereign credit executives worry about sovereigns because that’s their trade, and they don’t like to talk about their own toxicity to a stranger. Or their mother, even. Lenders moan about politically expedient economic policies because they threaten their payback chances. And these plus Hedgies harass nation States until they wake up. Or they behave like the lovechildren of sharks and vultures, depending on your outlook.
But we’ve been there and got the teeshirt as far as Sovereign insolvency is concerned. How the eurozone will end up (or simply wind up) remains anyone’s guess….and that really is all it will be. Berlin is sticking rigidly to the moral prurience strategy, although they display no awareness of what outcome they expect. This is very much the tactic being employed by the MerkeSchauble tanks, because it is clear to anyone who can read a table of numbers that the German people are scared witless about what they’re up to. The Slog is sticking to the ‘planned debt forgiveness’ because I happen to believe it is the only answer – and while moralising can be fun, it doesn’t get results. Last but not least, Mario Draghi at the ECB in Frankfurt is sticking to his ‘I am but a chaste central banker’ line. By and large I agree with it, but rape is heading his way, so I think (no, I know) that the shrewd Italian will have some delaying and distraction plans already carefully laid.
This nonsense is grabbing the headlines because it’s history-changing stuff. But history is often made by people and events away from the battlefield. And while the eurozone management crisis gets the editor’s choice as the lead right now, the key catalyst that changes everything is unquestionably going to be bank failure. The bank failures will be horrific, some of them unexpected, and far more contagious than most laymen realise. This is because of collateral deals, hedges held with people going down anyway, and above all, lies. There’s no point in asking a senior banker a question, because the answer will be untrue. Bigotry? Not really: we’re back at the tediously repeated Slog mantra. “Listen not to what they say, but watch what they do like a hawk’. What the bankers and the financial authorities are doing at the moment is the key to understanding where Crash 2 goes next.
Tim Geithner’s decision yesterday to hold a US Bank stress-test with no holds barred tells you what he knows: panic between paranoid, untrusting and greedy bankers is infinitely more contagious than Sovereign problems. The story revealed here about Mario Draghi’s concern after unearthing eurobank borrowing fiddles shows how manically desperate some of these institutions are. The widening Libor rates (based on what each participating bank says it would have to pay to borrow money from another bank) give clues as to how many banks are struggling to raise cash. In 2008, the spread shot from 7 to 115. Since October it’s been edging up again: it’s currently at 30.
The amount of money being parked at the ECB overnight by eurobanks – and with the Fed by US firms – is also rising quite sharply. This too is a measure of mistrust between banks. Such mistrust leads to liquidity problems and much less lending to business. It’s another reason why both the UK and eurozone economies are now flatlining.
Nicolas Sarkozy hasn’t been engaged in a major assault on the EFSF and ECB for the fun of the battle: without that money, he knows at least three French banks will fail. He could then lose his AAA rating. That would further destabilise the eurozone….but it won’t be a sovereign fiscal incontinence problem at all: it’ll be dumb bank lending policies that did for him.
The more fragile the banks might feel their position is in a world gone mad, the more their hype increases against any form of test, investigation, regulation or breaking them down in size. Only this morning, Robert Jenkins of the UK’s Financial Policy Committee, came out bluntly in the FT to observe, “A profession which should stand for integrity and prudence now supports a lobbying strategy that exploits misunderstanding and fear”. He’s right of course: drivel emerges from every banking house about ‘the loss of liquidity for business’, when the figures show that they’re already starving business of loans. They starve business of loans because they’re scared to lend.
When ordered by the eurozone recently to deleverage their balance sheets, eurobanks opted to do it by selling assets. What Brussels and Basle wanted was for them to reduce loan business, and take fewer risks. The banks can’t afford to do that: without the cash-flow from those folks who are repaying loans at a profitable margin, their income streams would rapidly dry up. When asked 658 times to take a larger haircut on Greece, the banks said no – in the full knowledge that the haircut they finally took (around 35-40%) was condemning the Greeks to death. But they had no choice: it was kill or be killed by that time. Very few banks in the EU even today are equipped to take, say, a 100% write-off from Athens, and even 40% from Italy. The collapse of banks would, after a short time, be happening on a near-daily basis.
Of course, banking problems and Sovereign debt are inextricably linked at all times. My point here is very simple: we have had the overture, and this has established that the eurozone’s 17-member single currency experiment is not just an abject failure….it’s also a terrifying trailer for what comes next.
What the prancing politicians and eurocrat eunuchs decide to do next is interesting, but the focus now shouldn’t be solely on the latest yield spike for Spain or France. It should be on the signals being quietly given out by a combo of announcements, bank behaviour, and statistics. This really is now a case of ‘It’s the banks, stupid’. The emphasis of Slog coverage will try to reflect this rather more from now on.