Category: European economy

Alternative Stress Tests from OECD and Citi

One of the aspects of the CEBS European stress test exercise that has been commented upon quite widely is their decision to only apply haircuts to sovereign debt held on the trading books of the banks examined. However, most of these bonds are held on the “banking books” on the understanding that they are being held to maturity and the CEBS exercise assumed no sovereign defaults over the time horizon considered, so no haircut was applied to this portion of the bond portfolio.

In reality, the trading book\banking book distinction is arbitrary. In the case of a default or restructuring on these sovereign bonds, the distinction is meaningless. In the case of a bank failing, the distinction also doesn’t mean much: If the assets of the bank need to be sold off to meet liabilities, then bonds originally intended marked as hold to maturity the banking book may still have to sold off at market values.

I’ve come across two interesting alternatives to the CEBS stress tests. The first is this report from the OECD, which takes a macro look at the topic. They calculate that 83% of the exposure to EU sovereigns is held on the banking book and the report gives a good sense of the exposures of banks in different countries to various types of sovereign risk.    

The other alternative comes via the Calculated Risk “Some Investor Guy” series on sovereign debt. The Guy linked to this rapid response piece from Citi, redoing the analysis on a bank by bank basis. Applying the haircut to the banking book as well as the trading book, the number of European banks that fail the test rising from 7 out of 91 to 24 of 91.

FT article on German growth

This FT article is well worth reading. It asks a question I had been idly wondering about: is German growth just a reflection of Chinese growth? If so, then the issue of whether Chinese (or more broadly, perhaps, Asian) growth can become self-sustaining, or will continue to largely depend on sales to over-indebted American households, is a question with major implications for the European economy.

Update: I have just come across this piece by David McWilliams on similar themes. I guess the hope for Germany is that their growth is based on more, ultimately, than Chinese exports to the likes of us.

Committee on European Affairs Report on EMU

The Joint Oireachtas Committee on European Affairs has produced a report titled “European Monetary Union: Challenges and Options”. The report is available here and the executive summary is here.  Senator Paschal Donohoe acted as Rapporteur on the Report, which was drafted in association with my former UCD colleague, Rodney Thom

ECB Bond Purchase Program Almost Done?

Though as I write the official release has yet to appear here, the FT is already reporting that the ECB only acquired about €1 billion in sovereign bonds last week, down from the €4 billion or so seen in previous weeks and the €16 billion that occured during its first week. The winding down of the program was quasi-predicted here a few weeks ago.

One interpretation of what has happened with this program is that the ECB reluctantly launched the program despite some internal disagreement to ease tensions in sovereign debt markets, and that once the Stabilisation Mechanism funds were put in place, they have been quick to head for the exit.

Increasingly, it seems unlikely that the ECB will at any point engage in large-scale purchases on the secondary market aimed at keeping access to the primary market open for a specific country such as Ireland. Rather, a closing primary market will instead lead to a country to tapping the Stabilisation Mechanism funds.

Of course, one cannot completely rule out the ECB will re-activate the program on a larger scale if tensions start to mount again. But I wouldn’t bet on it.

Update: Official announcement confirms the figure at 796.5 million.

IIEA Event on Europe’s Sovereign Debt Crisis

The Institute of International and European Affairs recently held an event on the European sovereign debt crisis. The event featured Dietmar Hornung of Moody’s Sovereign Risk Group, Lee C. Buchheit, a legal expert on sovereign debt issues and Ann Pettifor of Advocacy International who is known for work on sovereign debt and international finance such as the Jubilee 2000 (Drop the Debt) campaign.  Podcasts of the presentations and slides are available here.