We may only be a couple of trading weeks
into the calendar year, but the competition for
the Man of the Year for 2012 may already be over.
With a breathtaking display of chutzpah and
impossible acts of bravado befitting an alumnus of
Goldman Sachs, the new president of the European
Central Bank (ECB), Mario Draghi, may already have
saved the eurozone and with it, the global
economy.
For that is what both the bond
and equity markets are telling us, now that a
series of bond issues in Europe have gone very
well, with even bankrupt Spain raising new money
for less than 5% this week.
The proximate
cause of this would be the ECB three-year loans to
European banks (which attracted over 489 billion
euros, or over
US$600 billion, of demand
in December) and a second tranche next month is
expected to dole out another 400 billion euros in
long-term liquidity to European banks who are
unable to borrow in the markets.
The flood
of liquidity engineered by the ECB has more than
offset any investor concerns arising from a set of
dreaded set of credit rating cuts engineered by
S&P (including the much-prized triple-A rating
of France).
Amidst the euphoria, readers
are requested not to exercise their grey matter
too heavily. For example, now is most certainly
not the time to consider the moral hazard entailed
by lending Italian banks three-year money at a
rate of 1% at a time when sovereigns of the same
countries were borrowing at over 7% (when they
could find the money, that is).
It also
shouldn't attract any scrutiny at all that
European banks have a severe shortage of capital,
so in effect the ECB was (and will be again)
printing money to lend to folks who weren't all
that thrilled to be lending to each other. So much
so that when the banks got the money from the ECB,
they all went and lent it back to the central bank
at 0.25%.
That's right - the ECB was so
successful that the banks decided to take a
negative net interest margin of 0.75% with the
money they got. Even a few weeks later, a good 400
billion euros still sit with the ECB overnight
from the banks rather than being on-lent to the
"real" economy.
No one should tell all
those suddenly bullish folks that even the
European banks' industry body (the EBA) advises
banks to raise their capital levels to over 9% by
the middle of this year, which can only be
achieved by selling good assets quickly (at
discounted prices). That's why the banks are
hoarding liquidity even as the new credit crunch
will push the European economy into a severe
contraction by the second quarter of this year.
No really, no one tell them all these
facts.
Then there are the European
sovereigns. They have been roundly downgraded, and
things aren't getting better anytime soon. There
is a chance Greece will yet slip into a disorderly
default even as everyone attempts to get a
face-saving deal that will see creditors recover
barely 30% from the country's debts.
Even
at that horrendous discount (a "haircut" as it is
cutely referred to in the debt markets for what
looks more like a decapitation) it is not clear
that Greece will have a sustainable debt load.
Indeed, recent reports of net emigration from
Greece are troubling enough for even Europeans
(not generally known for their economic or
financial prudence) to want to downgrade forecasts
for debt reduction and long-term prospects.
Italian banks benefited from the
munificence of Mr Draghi - who took office barely
two months ago - to the tune of 50 billion euros,
burnishing his chances of becoming a prime
minister of the country in future (you read it
here first). They have also taken his message to
heart and fully supported Italian government bond
auctions - before quickly selling on to
unsuspecting retail investors of course.
The government of Brussels-appointed
technocrat Prime Minister Mario Monti has made
some cosmetic reforms, but doesn't quite seem to
have any handle on reducing debt or indeed even
cutting the deficit meaningfully. Mr Monti is
quickly forgiven for his lack of success, unlike
his predecessor, Silvio Berlusconi.
How
long does a honeymoon last these days in the debt
markets, anyway? Oops, sorry that was another
unintended question for the market honeymooners.
Do I even need to bring up Spain? Its
economy is not only too big to rescue, but also
too difficult to handle, what with rampant
property market declines, failing banks,
collapsing consumption and rising emigration.
Then there is Portugal, whose credit
spreads have quietly gone wider through this
week's euphoria as market participants quietly
line up their next target after Greece. With over
275 billion euros in debt that needs to absorbed
over the medium-term, Portugal will be doing the
equivalent of wrestling with a 900 pound gorilla
for a market that failed to come to grips with the
50 pound monkey that was Greece. I really didn't
mean to put in a reality check here, honest.
Meanwhile, the World Bank warned
developing countries that their growth projections
were seriously off kilter; that falling
consumption in the Group of 10 countries would hit
their exports sharply just as rising commodity and
other prices were pushing their central banks to
raise rates and hamper consumption growth at home.
That these economies were meant to supply the
necessary funds to absorb all the excesses of G-10
is a minor detail at this stage. Of course.
Did I forget to mention that the chief
reason for the market's euphoria earlier this week
pertained to International Monetary Fund plans for
a $500 billion boost to its fighting fund.
One-time only offer, you understand. This was duly
subscribed to by such fiscally conservative
governments as the United States, Britain, Japan
and the "top" tier of Europe. That every one of
these countries will have to borrow from private
markets immediately to fund this allocation is, of
course, of no immediate concern to anyone in the
markets.
All in all, right there is the
reason why Mr Draghi is already the Man of the
Year. By creating a masterful illusion of
stability, he has sent global equity markets
packing to their 15-year highs (January returns).
Mere facts will do nothing to derail such a rally,
which is what makes it truly a remarkable piece of
work by the ECB president.
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