Finally some recognition yesterday from the EBA that the imposition of a 9% capital buffer (by June), for all eurozone banks, might just be making a bad situation worse. Chairman Enria suggested that the EBA would review the 9% capital requirement should the policy measures implemented by the various eurozone governments to fight the sovereign debt crisis result in lower bond yields.
After the fiasco with UniCredit’s rights issue over the past week and the resultant collapse in its share price, the EBA needed to at least show some flexibility or else its desire for the 9% target to be achieved through capital raisings would be rendered incredulous. Even so, it appears the EBA has a long way to go (on an intellectual level) before it grasps the impossibility of its demands. Video:
Even yesterday, it was claiming that it would check to make sure banks were not reducing lending in order to achieve the 9% target, and that it had not yet received requests for the deadline for the capital increase to be extended. Clearly, banks do not yet feel able to ask for an extension, at least in public, because it might frighten shareholders.
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But, rest assured, the requests will start to come in thick and fast at some point, and probably quite soon. The EBA still wants banks to chop bonuses and retain earnings – the former is possible (although will be sternly resisted), and the latter is problematic (because there will not be much earnings to retain). Some banks are looking at raising capital privately rather than through public markets – in some instances, this approach could succeed, but it will be more the exception than the rule.
Commentary
Dollar demand drags down the euro. That recent forex favourite (the dollar) made decent gains against all major currencies yesterday, with the dollar index up more than 0.5%. Helping to encourage renewed dollar demand was the latest set of troubles to engulf the eurozone. There was plenty to keep the bears in the ascendancy – there were rumours that S&P was going to downgrade France imminently, Fitch warning of a potentially cataclysmic collapse in the euro, a decline in German GDP last quarter, collapsing Spanish industrial production and a call by Italy’s SDP to get out of the euro. Interestingly, European bonds yields were lower across the board yesterday.
Two hard lessons for Hungary. The tough love that Europe is now able to dish out under new rules is already being felt by countries submitting their annual budgets to the European Commission. Belgium has already been subjected to the new-found wrath of the Commission, and yesterday it was the turn of Hungary. In response, the improved tone of the HUF witnessed over recent days was partially reversed. The main concern of the Commission appears to be the sustainability of the improvement in the deficit seen last year which it believes is more down to one-off factors that will not be repeated. But Hungary’s current predicament is very much inter-twined with the eurozone’s sovereign debt crisis. The contraction of credit provision has hit Hungary particularly hard, given its dependence on foreign capital and also funds from embattled eurozone banks. This at a time when the household sector is suffering terribly because of those foreign currency mortgages taken out a few years back when the HUF was much stronger. The resilience of emerging markets in the first leg of the credit crisis back in 2007-08 was notable, although much of this was owing to the ramping-up of savings in Asia especially after the harsh lessons of the late 90’s. Hungary stands out because it is facing up to issues that affected Asia years ago (over-reliance on overseas capital) and the eurozone periphery at the time (achieving budget targets in a tenuous and unsustainable way). It’s going to be a very bumpy road for Hungary in 2012.
Funding relief for Europe’s battered banks. European banks are grateful for some of the relief apparent in funding markets over recent weeks. The 3mth cross-currency basis swap for European banks to borrow in dollars fell to -87bp on Wednesday, a 3mth high. B- back at the end of November, it reached -160bp. Interestingly, the ECB’s long-term LTRO is not really having that much impact on the 3mth Euribor-OIS spread, which is now 90bp, down from last November’s peak of just above 100bp.
More Spanish agony. Surely few now doubt that Spain is back in recession after Tuesday’s news that industrial production fell by 7% in the year ended November. In the month of November alone, production was down by more than 4%. Still, it is worth noting that back in 2009, the year-on-year decline in industrial production was more than 30% for most of the year. The Bank of Spain has already suggested that growth in the economy contracted in the final quarter of last year. On the fiscal front, the Spanish pParliament debated a fiscal austerity package yesterday drawn up by new PM Rajoy. At the end of 2011, Rajoy announced emergency tax increases and spending cuts worth EUR 15bln. This was in response to learning that the budget deficit for the year would be well above target – at around 8% of GDP.
Germany – the envy of the EU. Germany remains the envy of the rest of the EU. Consider the following – GDP rose by 3.0%, inflation was 2.1%, and the budget deficit was just 1% of GDP. Little else needs to be said.
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