Macro Digest: Banks are back in focus... and that's bad news

http://www.tradingfloor.com/posts/banks-focus-s-news-990725587

 

To get a confirmation of a trend you need the banks to lead, dictates a good old rule of thumb in the stock market.  Unfortunately, the banks recently fell to the downside.

The European Bank Index yesterday suffered a big loss and we are now at major support, which needs to hold:

Source: Saxo Trader

And the Credit Index on banks is also rising:

There is ample reason to believe that deposits will flow from Italian, Spanish and Portugese banks as the whole concept of a bail-in of all asset classes will leave investors no option but to go for more safe havens. That said, I think it will matter little as we will soon see a full European version that mirrors the Swedish Bank model, which was financed by levies on assets in all of Europe (or Euro zone).

The main themes of the Swedish Bank model were (Wikipedia and an Economist piece from 2009 are the sources for the below):

During 1991 and 1992, a housing bubble in Sweden deflated, resulting in a severe credit crunch and widespread bank insolvency. The causes were similar to those of the sub-prime mortgage crisis of 2007–2008. In response, the government took the following actions:

·         It announced the state would guarantee all bank deposits and creditors of the nation's 114 banks;

·         Sweden's government assumed bad bank debts, but banks had to write down losses and issue an ownership interest (common stock) to the government. Shareholders at the remaining large banks were diluted by private recapitalisations (meaning that they sold equity to new investors). Bondholders at all banks were protected;

·         Nordbanken and Götabanken were granted financial support and nationalised at a cost of 64 billion kronor. Their bad debts were transferred to the asset-management companies Securum and Retriva, which sold off the assets, mainly real estate, that the banks held as collateral for these debts;

·         When distressed assets were later sold, the proceeds flowed to the state and the government was able to recoup more money later by selling its shares in the nationalised banks in public offerings.

·         Sweden formed the Bank Support Authority to supervise institutions that needed recapitalisation.

This bailout initially cost about 4 percent of Sweden's GDP, but was later lowered to between 0 and 2 percent of GDP depending on various assumptions due to the value of stock later sold when the nationalised banks were privatised.

This report is an excellent insight into the banking crisis: http://www.sns.se/sites/default/files/securum_eng.pdf

Again, today, the Club Med banks are under pressure, as seen by my Bloomberg screen:

Finally, we need to stop at government bond spreads as an indication to "contagion or not". The government bond market is not a free market. There is probably not even a market more manipulated by threats, liquidity and sheer political intervention; hence no value!

No; the new risk indicator is the banks and their relative performance to core banks and overall banks in the US. Here, the conclusion is clear: Beware that risk is increasing and has been rising even before Cyprus broke down or in, whichever way you want to put it.

PS: My friend Flavian Eigensatz added this to the above:

here previous turning points in the Bank Index. It seems, we got notified of a new one now.

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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