If Europe was a football team – it would be Glasgow Rangers…

Bill Blain’s Morning Porridge – March 29 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: [email protected]

This market is very news-sensitive. All looking a tad red this morning in the wake of poor US sentiment. Apparently the EU blundership is going to agree a compromise €940bn bailout fund – good for a year or so. Yawn.. Unconvinced.

There is fair amount of data with weaker UK housing prices, German labour and EC economic indicators – none were likely to surprise, but all will be watched for directional signals. Italy auction of 17s and 22s may get our attention for a moment or two…

A modest decline in German unemployment trends – hinting that even the full employment German economy may be slowing as companies reduce hiring plans. Slower – but not fatal.  The rest of Europe remains a quagmire – vulnerable to externals like oil, and internals like placating the Great European God of Austerity.  

Spain – what’s to learn from Ireland and Iceland

Lots of blogs focused on Spain yesterday. Most say ‘The Crisis’ is coming. All agree

banks will be at the epicentre.

Willem Buiter of Citi came out with a fairly negative view stating public finances look in worse shape than expected, growth forecasts are too optimistic, the government, households, corporates and banks remain over-levered, and losses are going to mount for the ‘undercapitalised’ Spanish banking system as property prices remain in freefall. (If you don’t believe me on Spanish property – try this website.. http://www.fotocasa.es/en/ ) (Thanks Conor!)

One of the key points Buiter made is the ‘Spanish Authorities may not have the resources to recapitalise their banking system’. That makes some form of ‘programme’ with the ECB, EU and IMF increasingly likely. Perhaps not a full bailout.. but what?

Even though a significant number of clients tell me I am wrong, I’m convinced we’re going to see a radical revaluation across Spanish banking assets. But what form will the adjustment take?

Over the years we’ve been following the Irish bank crisis, it’s never ceased to fascinate and surprise. I’m also sure it’s not going to be a unique story of Irish hubris and asset bubbles. I’m convinced we’re still going to see aspects of the Ireland crisis repeated on an ever grander scale in Spain later this year – which means not only losses, but also opportunities for investment.

There was a very interesting Bloomberg article on Ireland last night that’s worth a read: ‘Ireland Deserves Breathing Room’. The Irish face ongoing problems resulting from the bank bailouts – basically they can’t afford to make large promissory note payments through to the Central Bank of Ireland that underlay parts of the rescue.

It’s complex, but basically the Irish want to restructure these payments to ease the pain – making a €3bln payment later this week is going to be painful. Yet, the EU and ECB (of which the Irish Central Bank is now just a branch) is determined Ireland shall pay – saying rules are rules. Another case of the European tail wagging the dog?

Ireland bailed out its banks at the insistence of the Euro Elites to avoid a systemic banking shock across Europe. Yet, now the EE are making it tougher.  As the example of a now resurgent Iceland shows – perhaps Ireland would have been better to let the banks fail! Someone may push that point to the Irish electorate for the May 31 referendum – ‘effectively our futures were mortgaged to save Europe’s dodgy banking system!’

Which leads us to wonder what the right approach to the coming crisis on Spanish banks is likely to be?

        Let the truly awful Cajas default and support others?

        Be far more brutal on debt bail-in?

        If Spain’s banks are allowed to fail – how will that reawaken systemic banking risk across Europe?

        Will we simply pretend and extend the rotten façade of Spanish banking lest it trigger weakness elsewhere?

The Spain Caja system – as innumerable studies show – is even more prone to political favours as fading politicians found themselves parachuted into chairmanships to reward local party connections. In short, Spain’s banks remain an exceptionally messy situation – and we don’t see it ending well.. but we are wondering where to make investments….

On a connected topic, yesterday I was fortunate enough to be invited into a debate on Bloomberg with some fellow Scots on the prospects for an Independent Scotland. Fascinating debate, but one of the points highlighted is that small economies, where everyone knows everyone and everyone’s business, tend to become vulnerable to backslapping good-ole-boy corruption.

It clearly happened in Ireland where banks and politicians played a too-cosy game over land development, and it happened in Iceland where the divide between central bank as a regulator or speculator became blurred. Same thing could well happen to a small Scotland – or could it… we are better than that!

Another point that came up is the Glasgow Rangers/Euro metaphor – to which I am indebted to one of my fellow panelists (better not name him). Football in Scotland is a sensitive subject!

Rangers levered up with loads of cash, bought expensive assets, got eejits to buy shares and believe in the whole misadventure, diluted, split and creamed off the good stuff, and resorted to increasing complex forms of financing that left it naked when the tide (in the form of the tax-man) came in. Finally it admits to having no real money, but because it’s TBTF it’s in administration.*

Does that all sound familiar?

Out of time.

*Developing this theme, supporters of the late lamented Airdrieonians Football Club look on the situation surrounding Rangers with unusual interest, not least because it was action taken by a company owned by the former owner of Rangers, David Murray, which started the process that led to the eventual liquidation of Airdrieonians in 2002. Those who live by the sword can expect to die by the sword, perhaps. This writer of the history of Airdrieonians is keen to see whether what was sauce for the Airdrie goose in 2002 is sauce for the Rangers gander almost exactly a decade later. And if HMRC forgives any Rangers debt, I propose to change my name by deed poll to Brian Rangers FC Bollen and ask for equal treatment when it comes to paying my taxes. Brian Bollen, editor.