Policy – or the art of standing still

IFR 2051 20 September to 26 September 2014
6 min read
EMEA

AMONG THE VERITABLE smorgasbord of themes and events out there, people have commented that I’ve been silent on both Scotland and Alibaba over the past few weeks. Believe me, that was no accident. On the former, I certainly had no intention of adding to the wall-to-wall cacophony of trivia and speculative non-sequiturs that news channels have attempted to disguise as analysis.

Oddly enough, I don’t give a toss what comedians or clapped-out celebrities think about the constitutional, political or economic issues emanating from putative secession. And the main political protagonists merely engaged in tit-for-tat point-scoring and snide inferences. Anyway, the Scots voted no. Did anyone really think it would go any other way … no really?

On Alibaba, the blow-by-blow news and analysis has similarly been fatiguing. Not to naysay the effort involved here, but we got to the place we all knew we would. The sextet of bookrunners is printing at the top of the revised range – a range that has nonetheless been designed to pop on debut for full effect. The price values Alibaba at US$168bn, though analysts reckon it will hit US$200bn on debut. Underwriters spent 48 hours in the allocations meeting.

And it will be the world’s biggest IPO if the greenshoe is exercised (otherwise it will be number three behind AgBank and ICBC for an albeit 1-2-3 China). Once cheap speculation becomes available through CBOE and ISE listed options, who knows where Alibaba will end up? So there you have it: two themes and thousands of hours of professional endeavour squeezed into four paragraphs.

I don’t see any of this getting us to the place those public policymakers want to lead us

ACTUALLY, I’VE BEEN more taken with the interplay between the ECB’s recent monetary actions and policy pronouncements and the forthcoming eurozone asset quality review and stress tests; the Fed’s stance on rates; and anxious comments by the IMF to the G20 meeting in Cairns (sun, sea, sand and … seminars) about the huge latent risk and leverage building up in the system as a result of it all.

Everything has become so circular and public-policy-generated, but more to the point I don’t see any of this getting us to the place those public policymakers want to lead us: into a growth cycle funded by private monetary transmission to the real economy. The take-up of just €82.6bn in the ECB’s first TLTRO (a fair chunk to Spanish and Italian banks) clearly undershot expectations, which were running at €300bn at the top end.

The exercise was seen by some as a failure, although I wouldn’t go that far – let’s wait until the December auction to judge. It just seems – well – kind of pointless, just like the ABS and covered bond purchase programmes will be. The ECB persists in telling the story of its operations supporting the real economy. But no-one believes it and the evidence doesn’t support it. I frankly doubt Mario Draghi or his cohorts believe their own hype.

The ECB is in fairness caught between a rock and a hard place, but the reality as we all know is that banks have been massively dis-incentivised from lending because of the triple-whammy of chunky capital requirements, onerous liquidity, and leverage requirements forced on them by the same policymakers. On the flip side of the coin, loan demand in many parts of the eurozone remains terminally weak – particularly in the periphery, where many banks are in no position to do anything about it even if demand were there.

No, the banks will use cheap ECB money to fund carry trades and fix balance-sheet issues. There have been increasingly vocal calls for the ECB to bite the bullet and load up its balance sheet with sovereign debt. Fine, but again you’ve got to ask: to what effect and to whose benefit?

It would certainly help the ECB grow its balance sheet to €3trn (notwithstanding the fact that repayment of three-year LTRO loans next year will make that task more difficult). But by the same token, its actions will continue to distort flows to the private capital markets, undermine true price-discovery and mask the true cost of funding. They will ultimately increase already existing tendencies to leverage up on the riskier assets that pretty much everyone out there professes to be extremely anxious about.

GLOBAL CENTRAL BANKS are choosing to cut the ECB some slack on engineering euro weakness given low growth and deflationary tendencies, but that won’t last. I doubt we’ll see currency wars per se, but altruism will have a limited life-span.

The capital shortfalls coming out of the AQR and stress tests won’t result in massive headlines. Given all the remedial efforts of the past months, I don’t see the outcome diverging too far from the €50bn mark once this year’s actions have been factored in, with a margin of error on either side.

On the banking front, the bigger issue is that when’s all said and done we still haven’t fixed the TBTF issue; the old risks that policymakers have tried to solve are being replaced by new ones (such as unbridled risk-taking and risk shifting to the shadow banking sector) just as asset valuations are at or nearing bubble territory.

And so to my reference above to bewilderingly puzzling decisions. If one of the prime areas of focus of the past half-dozen years since the global financial crisis has been to break once and for all the sovereign-bank negative feedback loop, where does the ECB think demanding sovereign or EIF guarantees on mezzanine ABS tranches is going to lead? And here’s me thinking it was all about bail-in these days. Taxpayer liability, anyone?

Keith Mullin