>GREED & FEAR:Bank Junkies (CLSA)

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If the ECB has not been doing enough to monetise according to many its critics, it is going out of its way to help the banks. It is this liquidity provision which is the prime reason why markets have calmed down of late, not the half-baked “Merkozy Plan” for a “fiscal pact”. The news yesterday that 523 euro area banks have borrowed €489bn for three years from the ECB should help European banks through their massive bond refinancing schedule in coming months, though it should be noted that nearly €300bn of this amount will be absorbed meeting maturing loans. Meanwhile, the level of demand for the ECB’s three year money is, of course, a
symptom of European banks’ general stress levels.


The other issue is whether the banks will use this facility to buy lots of Eurozone sovereign debt, as the hyper active Nicholas Sarkozy seems to expect. While there will doubtless be some buying of short term government paper, GREED & fear doubts the banks will behave in such a manner so long as these banks have not been nationalised and taken over by governments.


The reason is that, for now at least, these banks are still in the private sector. The interest of their shareholders, which increasingly includes senior employees on deferred equity linked remuneration, is to deleverage rather than to take on new risky lending. It is also not to be diluted by raising equity at current distressed prices. Of course, if banks are nationalised down the road, as is quite possible, then coercing them to buy their respective government bonds becomes much more likely, a form of financial “suppression” long discussed by CLSA’s legendary investment guru Russell Napier.


The other point is that the ECB’s expanded funding of the banks will simply ensure that the Eurozone sovereign debt crisis, and the related European banking crisis, become ever more intertwined. A good article on the weaving and dodging going on to help European banks without calling it a “bailout” was published in yesterday’s Wall Street Journal (“Bank Aid: Just
don’t call it a bailout”, 21 December 2011).


In the meantime, GREED & fear would still advise investors to use any rebound in the S&P500 to the 200-day moving average as an opportunity to reduce exposure further to risk assets. The 200-day moving average is now 1260. While the decline in activity can partly be explained by the time of the year, the dramatic collapse in trading volumes in recent weeks is also an indication of the damage done by the relentless volatility. Thus, Asia ex-Japan stock market average daily trading volume has fallen from US$27bn in early November to US$20bn in the past two weeks (see Figure 2). GREED & fear would also advise investors to continue to bet against the euro. As is only to be expected of a former employee of a famous investment bank, Mario Draghi has already shown himself to be a far more flexible fellow than his predecessor, and he will be cutting interest rates again as soon as he believes he can get away with it.



Returning to the theme of financial suppression, Asia saw an example of suppression of late with Singapore’s decision earlier this month to impose a draconian 10% additional buyer’s stamp duty (ABSD) on foreign purchases of residential property. Since the residential property market in Singapore was already correcting as a result of rising supply and a succession of previous anti speculation measures, this latest measure was virtually akin to kicking someone in the head who is already lying prostrate on the ground. This is why the Real Estate Developers’ Association of Singapore did not welcome the decision arguing that the local property market had long ceased to be speculative. As a result of the latest measure, CLSA’s Singapore property analyst, Chin Hong Pang, now forecasts a 10% decline in residential property prices next year and a 35% decline in private new home sales (see CLSA research News muncher: Singapore property – A surprise move, 8 December 2011).


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