Chillin' out till it needs to be funded
First the bond markets commentary and the bank recapitalisation ideas that did not survive week one of 2012:
The yields on the German bunds for the 10 Y tenure on auction yesterday improved to 1.93% and banks picked up the $5.2 bln worth without a hitch but the demand bid cover ratio was barely enough at 1.3, meaning that if it had been even $7 bln dollars or EUR 5.25 blln on offer, there would have been a devolvement on the bonds without enough demand.
Meanwhile even as Spanish banks break down overnight, Italian Unicredito had big egg on its face as its rights offer ( fully underwritten
by 25 banks) devolved despite a 69% discount to trading price. The $9.60 bln rights offer would have filled its remaining Capital Gap bu tgot a $2.4 bln subscription done at the price In the meantime, shares plunged 10% (9.9%) and hit the circuit breaker suspending trading in Milan in Unicredito shares. Spain’s banks need to raise $65 bln as per the latest Spanish government admission to deal with bad property assets, timing the announcement to perfection after the new government in office baselines its possible future performance on its inherited legacy of 20% bad property assets, 22% unemployment and a 10% fiscal deficit.
TODAY’s AUCTIONS IN FRANCE WENT OFF OK, FRANCE RAISING THE EUR 8 BLN IN BONDS WITH A BID COVER OF 1.64 and got off easy on the yields with a 3.29% agreed yield but there is more pain with France tracking downgrades in its rating and trouble in Spain’s quarter as also in Belgium tracking to French bank holdings
HUNGARIAN yields in the East rose to 11% for the 10 y term Hungarian Florint losing value to 328 Forints per Euro Hungary’s government tried to demote its Central Bank with extra loading of the interest rate committee and merging with a regulatory agency but tomorrow goes back to the ECB
On the other hand, Even as Bank deposits with the ECB are down from the EUR 440 bln high but still the most preferred parking place, banks continue borrowing from the ECB even outside the 3 year LTRO facility for nearly $15 bln everyday only to put the money back into deposits with the ECB as OIS ( Overnight index Swaps ) indices show a building trust deficit in a 120 bp gap to the 3 month Euribor. Banks are making direct losses of 1.5% on such deposits as lending comes at a penal cost of 1.75% from the Emergency facility Other banks are obviously no longer a good risk to lend to.
The Economic Slump
Needless to reiterate, Europe is going to be increasingly marginalised with most US banking sector linkages dropped from portfolios in the second half of 2011. Despite protestations to the opposite, and a steep fall in exports thru the year 2012, Europe is unlikely to spread thru the globe as another edition of the contagion even as it stares at more than 5% contraction in GDP for the year. The PMI’s are lower than 47 and have most importantly affected smaller international trade players like Singapore and South Korea, who will survive and Taiwan, Philippines and Indonesia probably that will suffer longer term deterioration in prospects.
Economic data also indicates that while Germany is doin well having generated 4 mln jobs instead of additional losses, participation rate up to 41 millnion an all time high, it may siuffer from its dependence on manufacturing while UK has crossed the rubicon after saying no at the integration summit returning a 49.8 par score on the PMI and a 54 score on the Services PMI meaning the GDP will increase in tune withth e US recovery and services growth will lead its recovery. for Germany, it is more a case of lasting out the naysayers as people question the Euro but its own Economic strengths that were behind the decision to create the common market are still paying dividends for it, while UK is likely to lose some of its share in the common market as well as France
The slightly weak currency could infact be Germany’s ticket to growth fuel as it is not a mineral resources trader, and could also be the saving grace France needs.