Sin Luchar, Ni Pan, Ni Libertad!

Mint – Blain’s Morning Porridge October 1 2012

Sin Luchar, Ni Pan, Ni Libertad!...Si eso/Pasa (Whatever/Get over it)!

Welcome to Q4. This is where 2012 gets really really interesting. Europe? The US debt cliff? The sorry state of China? Global growth? Political nonsense? Pick your poison. Volatility set to rise, but some clear stories and themes to follow.

But first, sorry for the lack of Porridge late last week, but an unexpected appointment with the kind folk at Southampton General Hospital and a kidney stone put paid to my intent to dig for inconsistencies in the Spanish bank audit and lay out some investment themes and strategies for Q4. I’m going to keep it short this morning, but full service resumes tomorrow.

I wouldn't wish a kidney stone on anyone. My doctor says drink plenty of diuretics - so medicinal lagers at lunchtime? If anyone else fears them, feel free to join me!

If anyone has thoughts on the Spanish bank audit I'm all ears. The results show a €54bn capital need across the sector – an encouraging number well below the €100bn already earmarked for the rescue. However, it seems to me that capital ask is founded on relatively benign assumptions about how much the Spanish property market is set to fall. The decline assumption doesn’t match what we saw actually happen in Ireland – and it’s clear the Spanish property market has not yet bottomed.

Even though it’s been presented as irrefutable, and the quality of Wyman et al is unquestioned, many of my Spanish colleagues still doubt the veracity of the audit. The numbers I've seen from Spanish property firms, the visual evidence on property websites, and anecdotal stories of new but rotting empty suburbs where the local council can't even fill the new swimming pool, suggest Spain's property crash continues to deepen. In some of municipalities worst hit by the austerity driven recession, unemployment and a lack of bank mortgage provision means the market has died – I’m told in Valencia there are simply no takers at €60k for a three-bedroom new build. Despite the bank bailout, bad bank and such, the suspicion is banks are still hoping to pretend and extend property development loans!

But so much for Spain – what should holders of Spanish debt do? The €100bn capital cushion the EU is set to provide should reassure holders of Spanish bank senior and covered bonds as safe from "burden-sharing".

If it happens! Any bailout is conditional. There is still a staggering amount of political uncertainly detectable in the current badinage twixt Germany and Europe. It’s clear the Germans are demanding a degree of retracement on the grand undertakings about banking union. Even Oily Rehn, EU Economics Chappie, admits: “different interpretations” of what agreed on banking union exist.

But Germany won’t let Ireland and Spain simply mutualise their respective banking problems into the ECB. Germany is making clear banking union is limited, that banking losses in Ireland or Spain are legacies that remain entirely domestic, and the whole saga of a debt and banking union is not agreed.

Which then raises the problem of what happens to the banking crisis in Spain and Ireland if the economic crisis deepens and the electoral impossibilities continue to grow? It’s entirely possible to forsee a situation whereby political imperatives caused by rising unemployment, collapsing GDP, and continuing uncertainty on what the ECB and such can achieve, could lead to renewed domestic political calls for bank burden sharing. That will trigger predictable reaction from the rest of Eurpe to contain any damage. In other words, there are still major “no-see-ums” on the Spanish banking sector. I’m tempted to suggest any upside is a sell window. 

Elsewhere schweet budget from France. House prices in the French ghetto of Kensington rise as the next wave of French exiles hit London. JP Morgan in the press buying commercial property deals – makes sense.

Out of time.. more tomorrow..

BB

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