Tuesday, March 26, 2013

Behind the scenes of a disastrous European bargaining

This article from the Wall Street Journal is a must-read in order to measure the chaotic process of European negociations about the bail-out of Cyprus last weekend and the growing political mistrust and resentment between European countries.
"I have never, ever witnessed anything like this. It's a disaster.", a senior Eurozone official said.
The bitterness over the Cyprus mess will probably hamper future attempts to fix the bloc's flaws : if and when a much bigger nation like Spain or Italy will request a financial help from its European partners, will Eurozone have any chance to avoid a breakup ?
The next test of Eurozone cohesion will probably be Slovenia. A mess again ?

Monday, March 25, 2013

The Diesel-Boom effect

Jeroen Dijsselbloem (Diesel-Boom), the new president of the Eurogroup, who followed veteran Luxemburg Prime Minister Jean-Claude Juncker, declared today in an interview with Reuters and Financial Times that Cyprus rescue will be a model for future bailouts in Eurozone.
This model means that troubled banks will either go bankrupt or will be rescued by tapping private investors and depositors : European taxpayers will not have to pay anymore if banks fail.
"Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach”, he said.
This new approach marks a brutal change of course since the crisis began three years ago.
The ugly consequences of Lehman Brothers collapse in September 2008 let markets think that a new bank collapse will be avoided at any cost by authorities in order to keep the financial system working. And recent measures taken by European leaders, notably the setup of the 500 billion € European Stability Mechanism (ESM) decided 9 months ago, and supported by ECB Outright Monetary Transactions scheme (OMT), confirmed that conviction.
But since yesterday, things are different. As a perfect neo-conservative apologist, Mr Diesel-Boom insisted : “If I finance a bank and I know that if the bank gets in trouble, I will be hit and I will lose money, I will put a price on that. I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector.”
Result of this new paradigm in Eurozone :
In Italy, Intesa Sanpaolo -6.2% and UniCredit -5.8%. 

In Spain, BBVA -3.6%, Santander -3.2% and troubled Spanish lender Bankia slumped 41.4%
In France, Société Générale -6% while Credit Agricole lost 5.8%
Italy’s FTSE MIB index fell 2.5%.

Spain’s Ibex 35 slid 2.3%.
This is what we can call the Diesel-Boom effect.
Take care, and have a nice week !

Monday, March 18, 2013

ECB view about Euro area economic situation

Imagine you are a European prime minister or head of state, attending the Euro Summit on the 14th of March in Brussels.
Mario Draghi, President of the European Central Bank, starts his presentation about Euro area economic situation and the foundations for growth.
Here are the slides of his presentation.

Sunday, March 17, 2013

Risk-off everyone : Eurozone tail risk is back !

If you don't think that consequences of Cyprus bailout are potentially very serious, read this post from Felix Salmon on Reuters Opinion page.
If I were a Greek, Spanish, Portuguese or even Irish citizen, this precedent would certainly push me to think about the safety of my money in bank. I wouldn't be surprised if a bank run would happen on Monday in Athens, Lisbon or Madrid.
Where is the promise of an effective banking union in Europe with a deposit guarantee scheme ? This publication of the 15th of March from IMF looks like a real joke today. With this Cyprus deal, European leaders, IMF and ECB have lost a lot of credibility and confidence from European citizens. On the contrary, bonds holders, institutional and supranational lenders and speculators can celebrate : Cyprus bailout will not cost them a cent !
These events in Cyprus will certainly worsen the divorce in Europe between technocratic elite and the population. New Beppe Grillos will probably appear in various Eurozone countries in the coming months.
In the meantime, we will probably enter a new risk-off period in European financial markets. This will hurt after months of over-indulgent rising markets. Take care. Tail risk is back in Eurozone !