It's not recession... it’s an ‘activity contraction dynamic’

Bill Blain’s Morning Porridge – March 28 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]

Another ‘interesting’ day in prospect as I stare at my listless screens. It’s very much look, listen and (hopefully) learn. The markets feel poised for something to happen. But what? Is it going to be an oil/commodity driven system shock, will it be the US stepping up further system push to cure ‘unemployment at unacceptably high levels’, or will it be ‘Euro Crisis’ part 328? Who knows… we’re wide awake… yawn…

Volumes are very thin – although we’ve being seeing demand pick up for safety trades in the short-end and some corporate names, lots of our main real money accounts are sitting on the sidelines pondering their next moves.

One thing we’ve been wondering about

is the rally over the past sessions in Portugal paper. Although the Government has been robustly defending its record and the Portuguese are behind austerity, we suspect the main reason PGBs have rallied is very thin markets. Most of the street and real money is flat, but any attempts to cover shorts simply sees the bonds tighten dramatically on very low volumes. We suspect it’s a chase trade rather than a fundamental improvement in Portugal’s prospects.

Yesterday’s disappointing US consumer data saw markets on a wobble phase – Bernanke on the wires saying the financial system is better while housing is flat. What next we wonder... Holiday season starts next week and activity likely to thin even more.

After April it’s full blast into the French elections – and while Sarkozy may win round one, polls say he will still lose in round two. Then we have the thus far neglected Irish referendum on May 31. It’s going to be a fraught Q2.

But there is some great stuff in the papers this morning. The FT is now fully awake to the dangers of the LTRO – ‘by piling on funds to save banks, the monetary authorities may renew the euro crisis’, read it on: {http://www.ft.com/cms/s/0/82205f6e-7735-11e1-baf3-00144feab49a.html#axzz1qOOAUuFz}

Spain

The European Bikini-Alert buzzer is flashing red on Spain again. Rumours the Europeans have been lecturing the Spanish on their banking system have been hotly denied. A client yesterday jauntily sang to me yesterday: ‘The pain in Spain falls mainly on what’s built upon the plains….’  

1)        Recession – ‘activity contraction/contradictory dynamic’ as the Bank of Spain described the deepening Spanish recession and ‘intensifying’ job losses. It’s going to continue into next year. Zero growth means zero chance of reducing the debt load.

2)        Banks – at least €52bn in further property provisions are called for, and the ongoing rationalisation of the Cajas is progressing slowly. Yet Spain’s banks are effectively closed to non-crisis funding. Zombie banks indeed as the FT hints!

3)        Regional debt – as yet unclear on how much Junta debt is going to be covered by Spanish guarantees – or how many more will need last moment bailouts. Tension between town halls and the Cortes is increasing.

4)        EU Targets – Premier Ranjoy’s inability to hit EU deficit targets forced a compromise to 5.3% (from last years 8.5%). Spain will still struggle to make sufficient spending cuts – and as that becomes apparent confidence in Spain could be further dented.

5)        Social unrest – Spain has ‘previous’ in terms of labour conflict. General Strike tomorrow! Spain may yet prove too proud to swallow perceived European insults.

Yes, even as Spain lurches towards disaster, European Elites confidently inform us of the end of the European debt crisis. (Unfortunately similes such as ‘I See No Icebergs’ are going to get very common as April 12 approaches – but it best sums up euro complacency!) Spanish yields are widening.

Incredibly, we’ve got Bundestag members saying the gathering bond crisis is entirely Spain’s fault for missing the deficit targets…’ How long before German politicians with their eyes on the elections start calling Spain a second Greece? Fitch gets it: EU deficit targets are ‘unrealistic’.  

Spanish banks could prove the catalyst to ignite the Spain end-game. Spanish property lies at the centre of the crisis. Estimates on how much more developer loans and retail sector lending has gone bad range from €250-400bn (FT quotes €315bn). If that sounds a frighteningly large number – it should be triggering memories of the Irish banking system. And this week the Irish are in Brussels trying to negotiate a lower banking rescue payment!

Connected to the whole Spain banking farrago is an interesting debate going on within the Bank Capital community – that small bank of diligent individuals trying to work out what the regulators mean or meant to mean. One of the new triggers for loss absorption on sub debt is the ‘Point of Non-Viability’. PONV. The problem is how do you actually define PONV.

More to the point... when are the Spanish banks PPONV? (Past the point of non-viability.)

Enough and out of time…