Journey to Paradise?
Funding market tensions have triggered emergency measures at European banks, with some firms now dumping assets at the fastest rate since the collapse of Lehman Brothers as they seek to build up stockpiles of cash and reduce their reliance on short-term borrowings.
Nervy lenders have sold off billions of euros of "good assets" since the start of August, according to treasurers and business heads overseeing such sales, with some firms also halting new loans to large corporate clients in an effort to preserve cash.
Such a defensive response to the enfolding funding crisis in Europe is the clearest sign yet that credit market tensions - whether rooted in truth or unwarranted investor panic - pose an increasing threat to the global economic recovery, potentially choking off credit to critical engines of growth.
"We have taken the decision to sell off assets and reduce risk as a direct result of the funding situation," said one global head of markets at a large European bank. "Many of these are good assets, they are solid assets, but it's what you have to do to minimise your exposure to a funding squeeze."
"You are seeing banks shrinking, making choices and of course we are doing that too," said the head of corporate banking at another firm. "Funding is a key issue. This is affecting the whole industry, you just have to look at the numbers and it's pretty big."
Although worries in equity markets have died down of late, with bank stocks off their mid-August lows, credit markets continue to show signs of stress. Five-year credit default swaps on bank-issued debt recently touched record highs and continue to remain elevated.
Partially frozen short-term funding markets are yet to thaw. According to Fitch Ratings, the largest money market funds in the US cut lending to European banks by 20 percent in June and July. Senior bankers say that the situation has since worsened, and point to banks using emergency central bank swap facilities.
Longer-term funding markets are also dysfunctional. No European bank has done a senior unsecured bond deal since early July - despite about 150 billion euros of issuance in the first half. While a handful of covered bonds have come to market, activity is only a small fraction of its normal pace.
"Things have slowed in a big way," said one London-based banker who advises financial firms on debt issuance. "The volatility during August was exaggerated by a lack of trading volumes, but being realistic right now we would have expected many more deals back in the market."
Indeed, there have been some indications since mid-August that some banks are no longer lending to large corporate clients. French lenders were absent from a $900 million loan deals for Casino this week, for example, after dominating the domestic supermarket chain's previous $1.2 billion refinancing last year.
Earlier last month, two large European banks - Commerzbank and BNP Paribas - pulled out of a $12.5 billion loan to SABMiller to fund the brewer's hostile takeover of rival Foster's. That came against an increase in dollar funding costs which may have made the deal uneconomic for some.
"Eurozone banks have real problems getting funding," added the treasurer of another large European bank, which has also sold off assets recently. "Banks are building up their cash pools and increasing their liquidity pools by selling assets, and that will feed through to the rest of the economy."
Senior bankers spoken to for this article were unanimous in saying that political and central bank intervention is now needed to stabilise Europe's banking system.
"Have we seen banks selling off massive portfolios? Yes. Is it getting worse? Yes. Do policy makers have to do something? Yes," said the European head of one US investment bank. "Some banks are really under pressure and are decreasing their balance sheets for fear they may come under attack."
None of the bankers would elaborate on what kind of assets had been sold. Lenders tend to hold hundreds of billions euros in mortgages, loans and other securities at any one time. The assets are usually interest-paying but take up large proportions of a bank's cash - much of which is borrowed.
Still, treasurers and business heads said that it would be the most liquid assets which would be sold off first, especially given the market tensions of late, which have shut down secondary trading in many markets such as those for big corporate loans.
That could create additional problems, say some, leaving European banks stuffed with bad assets they are no longer able to sell or finance. "Unfortunately the first assets you sell off are the most liquid ones," said the markets head. "Many banks will end up with only their most illiquid assets left."
Bereft of their best interest-bearing assets, the sales could also eat heavily into profits, reducing many banks' plans to reach higher regulatory capital requirements under the Basel III rules through retained earnings over coming years. Given market drops, some assets will also have been sold at a loss.
"De-leveraging has been fairly aggressive, and given the falls in the prices of some financial assets during August some banks selling will have taken a big hit," said the London-based debt banker. "If markets pick-up, de-leveraging could too."
"The European policy makers have to understand this," added the boss from the US firm. "Banks have been deleveraging for the past two years, and if banks don't extend credit then that will feed back into the economy. I think we're going to be in pretty gnarly markets for some time."
Remember, in a world of contagion, a banking crisis in Europe can easily spread around the world. That's why I believe the Fed, ECB and Asian central bankers will intervene to make sure this doesn't develop into another 2008 crisis or something much worse. The problem is that European policymakers are about as inept as their US counterparts at addressing this global crisis. The longer they procrastinate, playing stupid political games, the worse it gets.
But crisis or no crisis, I'm heading off to Greece to visit my sister, brother-in-law and nephew in Crete. Life is too short to worry about work (read my previous comment on unemployment). I decided to take off to enjoy some time in Crete, swimming, tanning, reading, eating, drinking, sleeping, listening to music and spending time with my family. That's what is important to me right now and the rest will have to wait. I'll be trading and blogging off and on but mostly tweeting on Twitter (follow me on Twitter @PensionPulse) .
I'll also let you in on a little secret, September is the most beautiful time to visit Greece. The mad summer herd is gone, the weather is awesome (hot but not insane and nights are perfect), and you can find some great deals. If you're looking to travel to Greece (or elsewhere), I suggest you contact my travel agent, Peter Chilakos (pronounced "Hilakos" ; email : firstname.lastname@example.org). Whether your budget is 100 euros a day or 1,000 plus euros a day, he'll set you up nicely at boutique hotels he's actually visited and stayed at (pic above is from the Blue Palace resort in Elounda, Crete).
As I finish my last minute preparations, downloading music and movies on my iPod and iPad, I leave you with some wise quotes from Henry Miller, one of my favorite authors when I'm traveling anywhere, and glimpses of beautiful Crete, including wild, beautiful southern Crete. If you've never been to paradise on Earth, this place is the closest thing to it. Miller's quotes:
"Let me be, was all I wanted. Be what I am, no matter how I am."
"The aim of life is to live, and to live means to be aware, joyously, drunkenly, serenely, divinely aware."
"Develop an interest in life as you see it; the people, things, literature, music-the world is so rich, simply throbbing with rich treasures, beautiful souls and interesting people. Forget yourself."
"Serenity is when you get above all this, when it doesn't matter what they think, say or want, but when you do as you are, and see God and Devil as one."
"Everyone has his own reality in which, if one is not too cautious,timid, or frightened, one swims. This is the only reality there is."
"Everything we shut our eyes to, everything we run away from, everything we deny, denigrate, or despise, serves to defeat us in the end."
"Destiny is what you are supposed to do in life. Fate is what kicks you in the ass to make you do it."
"I need to be alone. I need to ponder my shame and my despair in seclusion; I need the sunshine and the paving stones of the streets without companions, without conversation, face to face with myself, with only the music of my heart for company"
"Why are we so full of restraint? Why do we not give in all directions? Is it fear of losing ourselves? Until we do lose ourselves there is no hope of finding ourselves."
"All growth is a leap in the dark, a spontaneous unpremeditated act without the benefit of experience."
"What holds the world together, as I have learned from bitter experience, is sexual intercourse."
"If there is to be any peace it will come through being, not having."
"There is no salvation in becoming adapted to a world which is crazy"
"When you surrender, the problem ceases to exist. Try to solve it, or conquer it, and you only set up more resistance. . . . The most difficult thing to admit, and to realize with one's whole being, is that you alone control nothing. . . ."
"I have found God, but he is insufficient."
"True strength lies in submission which permits one to dedicate his life, through devotion, to something beyond himself."
"Who wants to be a hundred? What's the point of it? A short life and a merry one is far better than a long one sustained by fear, caution, and perpetual medical surveillance."
"I’m an egotist, but I’m not selfish. There’s a difference. I’m a neurotic, I guess. I can’t stop thinking about myself. It isn’t that I think myself so important... I simply can’t think about anything else, that’s all. If I could fall in love with a woman that might help some. But I can’t find a woman who interests me."
"Every man has his own destiny: The only imperative is to follow it, to accept it, no matter where it leads him."
"One's destination is never a place, but a new way of seeing things."
"Do not be duped by little duties. Do not be a chore man all your days."
"Everything hinges on how you look at things"
"The one thing we can never get enough of is love. And the one thing we never give enough of is love."
"They never opened the door which leads to the soul."
"The world is not to be put in order. The world is order. It is for us to put ourselves in unison with this order."
"We create our fate every day . . . most of the ills we suffer from are directly traceable to our own behavior."
"Madness is tonic and invigorating. It makes the sane more sane. The only ones who are unable to profit by it are the insane."
"Have you ever seen a genius out there looking for a job? It's the saddest thing in the world. No one will hire him. There is only one place where he is always welcome- at the bottom."
"Life has to be given a meaning because of the obvious fact that it has no meaning."
"When one is trying to do something beyond his known powers it is useless to seek the approval of friends. Friends are at their best in moments of defeat. "
And my two favorite Henry Miller quotes:
"Voyages are accomplished inwardly."
"I have no money, no resources, no hopes. I am the happiest man alive."