Is there any Grecovery or Spainovery?

Besides strong public statements from EU Commission bosses that EU is in turning point in crisis the reality is much worse. You can find one example in Greece. Public Power Corporation has reported last week that many Greek households and corporations are not able to fulfill their obligation to pay their electricity bills. In total, debts to the power utility from unpaid bills currently amount to some €1.3 billion and growing at an average rate of €4 million per day. Yes this is also known as the “Grecovery”.

The similar situation is in Spain. Politicians started to celebrate because Spain has now clocked up two consecutive quarters of fragile growth and Spanish 10 Y treasuries (3.8%) have the smallest yield on the yearly basis. But the situation in country is not changing in the labor market. First there is 26 % unemployment rate. Spain has seen six straight years of job destruction. 198,900 jobs have disappeared in Spain in 2013. There are 1,832,300 households in Spain where nobody has a job. More than 3.5 million in Spain have been out of work for at least a year and some 2.3 million people have been out of work for at least two years. To demonstrate the seriousness of the situation is the example of IKEA 400 jobs offer challenged by 20,000 job claims from desperate Spaniards. It is stunning and it is possible to compare to Greece problem. There is no Spainovery whatsoever.

The same story is Italy. The country has also very low yield on 10 Y treasuries. On the other hand it is a little bit surprising to some of us that Italian bad loan rates rose at a stunning 23% year-over-year and in nominal terms it is EUR 149.6 billion. The Italian Banking Association admitted that it is the consequence of declining deposits (-1.9% YoY) and bonds sold to clients (-9.4% YoY) as Italy’s bank clients with bad loans have more than doubled since 2008.

A new study claims that an objective stress test of the Eurozone’s banks could reveal a capital shortfall of more than 770 billion euros (US$1 trillion) to bring bank´s capital to the level equal to 7 percent of their total assets to guard against failure in the financial crisis. The study shows that if there is a 40 percent fall in global stock markets which last over a six month period banks will need another 579 billion euros in a crisis to meet a 5.5 percent prudential capital ratio. We have to remained reader that the study covers only 109 largest banks compared to ECB exercise which covers 27 more. It means that objective stress test for all most important bank would create more complicated situation. The ECB stress tests assume that banks will write down only non-performing loans and meet ratio of 6%. The EU has agreed a 55 billion-euro backstop to resolve failing banks, which compare to those numbers look like drop in the see. The end of the stress test provided by the ECB will be in November 2014 as long as we don’t experience some real economy stress test.

China is becoming a hot topic. As we mention last week there is a possibility of the default of one investment shadow banking product this week and some claiming that this could trigger avalanche reaction within the Chinese banking sector. The PBOC has thrown nearly CNY 400 billion at the market in the last week but on the other hand Chinese regulators are probably prepared to let the product default to give a lecture to some investors not to think about these kinds of products as risk free. There are also some rumors that some citizens have been unable to withdraw “hundreds of millions” in deposits in the last few weeks in the area of Yancheng City which indicates rising stress on the financial market. This is also a reason why Chines CDS´s are heading into the territory they were in the last summer when we experienced huge distrust among financial institutions. So could we be calm? Right now there is no reason to panic. Chines financial sector is state owned so we needn´t see any avalanche as we experienced in the west. But who knows?

Next week we have FED´s FOMC meeting and some started to speculate that FED could announce another tapering of monthly purchases from 75 to 65 billion USD as was indicated by the former FED´s president Bernanke. On the other hand we had some disappointing numbers from labor market and some disappointing numbers from stock market. We will see what exactly happens and what kind of impact it will have on shaky markets.

Matúš Pošvanc

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