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India Equity Research Reports, IPO and Stock News
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● Bottom line: there is probably an initial relief rally that politicians
have got something out that is close to market expectations but
we see little in the packages so far to alter our core views; so we
stick to our underweight of Continental Europe and neutral of
equities.
● It is critical to put the European package into context—this is
happening at a time when US macro surprises have turned
positive for the first time since April, Japan has stepped up QE
overnight (the UK did this three weeks ago) and QE3 in the US
looks more likely than not and risk indicators are still generally
quite depressed.
● The goods news is European politicians have shown that they are
willing to act aggressively and take tough decisions if pushed so
that even if this combination of packages is not enough to draw a
line under the peripheral European crisis, they would act again
and thus the tail risk in Europe has been significantly reduced.
The ECB also seems to be continuing—even stepping up—its
SMP programme.
● The problem is that to draw a line under the peripheral European
crisis, we need ultimately to address two key issues: economic
growth and the mutualisation of debt. Click here for the full report.
Growth: The issue of a lack of growth in the periphery and more
generally in Euro-area is left largely unaddressed (we wanted to see
the EU structural funds brought forward and some EIB-funded
infrastructure spending plans)—and without growth the debt arithmetic
becomes unmanageable (without growth, Italy risks moving from a
liquidity to a solvency problem).
As we highlight in our recent note, we continue to see Continental
Europe skirting with recession (PMIs point this way, fiscal tightening is
1.2% of GDP next year, banks are likely to reduce RWA potentially
triggering a credit crunch—c.80% of corporate borrowing is via the
banks in Europe—and above all we believe wages need to fall 5% to
15% in Spain and Italy to restore competitiveness). We continue to
believe that the loss of competitiveness in peripheral Europe is at
least as great a problem as the excess leverage (we think peripheral
Europe needs a current account surplus, as Ireland has done).
Mutualisation of debt: The mutualisation of debt will take time with
promises to address the issue further in December (according to the
Euro-summit statement, an interim report on further fiscal integration
will be presented in December 2011 and a report on how to implement
the agreed measures will be finalised by March 2012.). This will be a
very long process with very significant political hurdles (parliamentary
approvals, treaty changes, and maybe referendum in some
countries—recall that the French and the Dutch electorates rejected
the European Constitution in 2005).
A brief comment on the measures
The EFSF (to be up and running by the end of November): The releveraging
of the EFSF looks to be 4-5x, raising the firepower to c.€1
tn. If anything, this is a bit smaller than we would have liked (€1.2 tn is
needed to fund peripheral Europe up to June 2013). The issue is quite
how they are going to get to €1.2 tn bearing in mind that once Italy
and Spain are excluded from the guarantees, there is only c.€200 bn
of guarantor capacity and therefore a 20% insurance scheme would
allow €1 tn of EFSF capacity and assuming funds are not used for
other means. The partly funded IMF SPIV is meant to run in parallel. A
lack of detail and implementation risk are source of potential
disappointment. We also need to see some of the guarantees or
purchase of guaranteed bonds coming from outside of Europe
(IMF/BRICs) otherwise it is simply Europe insuring itself and that
would risk a French debt downgrade, we believe.
Greece: it may be insolvent but could be liquid enough to postpone
default for a long time. The details are vague (although the debt swap is
meant to be in place in December and we think the new €130 bn
package would replace the old package), especially on the terms of the
50% reduction in face value of the debt. A 120% government debt to
GDP target by 2020 still leaves Greece with very high levels of
government debt and no doubt this target ends up assuming various
assumptions on growth, tax collection, expenditure cuts and
privatisation receipts- all of which have been missed to date. We believe
that ultimately solvency is not resolved until government debt to GDP
can be seen falling to c.100% with a sustained primary budget surplus.
The participation rate on a 50% haircut/PSI could also be very complex
and a very high take-up is not guaranteed. Remember the problems
with forcing the banks to ‘volunteer’ for the July 21st package.
Bank recap: Roughly in line with expectations but still half of what we
and the IMF had wanted to see (though to some extent the degree of
recap depends on the economic outlook—under the EBA stress test if
GDP growth was minus 0.2% in 2012, then banks would need €230 bn
by 2012). It is unclear how to make the banks avoid reducing their RWA:
it is logical for banks to do this as their cost of equity is c14% and their
loan to deposit ratio is still an extended 135%.
Guarantees on bank liabilities: Some vague positive statement
made on supporting banks’ access to term funding, but again we need
to pay attention to the detail. If the guarantee scheme adds to the
leverage of the EFSF or of Europe, then that further raises doubts
about credit quality.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Bottom line: there is probably an initial relief rally that politicians
have got something out that is close to market expectations but
we see little in the packages so far to alter our core views; so we
stick to our underweight of Continental Europe and neutral of
equities.
● It is critical to put the European package into context—this is
happening at a time when US macro surprises have turned
positive for the first time since April, Japan has stepped up QE
overnight (the UK did this three weeks ago) and QE3 in the US
looks more likely than not and risk indicators are still generally
quite depressed.
● The goods news is European politicians have shown that they are
willing to act aggressively and take tough decisions if pushed so
that even if this combination of packages is not enough to draw a
line under the peripheral European crisis, they would act again
and thus the tail risk in Europe has been significantly reduced.
The ECB also seems to be continuing—even stepping up—its
SMP programme.
● The problem is that to draw a line under the peripheral European
crisis, we need ultimately to address two key issues: economic
growth and the mutualisation of debt. Click here for the full report.
Growth: The issue of a lack of growth in the periphery and more
generally in Euro-area is left largely unaddressed (we wanted to see
the EU structural funds brought forward and some EIB-funded
infrastructure spending plans)—and without growth the debt arithmetic
becomes unmanageable (without growth, Italy risks moving from a
liquidity to a solvency problem).
As we highlight in our recent note, we continue to see Continental
Europe skirting with recession (PMIs point this way, fiscal tightening is
1.2% of GDP next year, banks are likely to reduce RWA potentially
triggering a credit crunch—c.80% of corporate borrowing is via the
banks in Europe—and above all we believe wages need to fall 5% to
15% in Spain and Italy to restore competitiveness). We continue to
believe that the loss of competitiveness in peripheral Europe is at
least as great a problem as the excess leverage (we think peripheral
Europe needs a current account surplus, as Ireland has done).
Mutualisation of debt: The mutualisation of debt will take time with
promises to address the issue further in December (according to the
Euro-summit statement, an interim report on further fiscal integration
will be presented in December 2011 and a report on how to implement
the agreed measures will be finalised by March 2012.). This will be a
very long process with very significant political hurdles (parliamentary
approvals, treaty changes, and maybe referendum in some
countries—recall that the French and the Dutch electorates rejected
the European Constitution in 2005).
A brief comment on the measures
The EFSF (to be up and running by the end of November): The releveraging
of the EFSF looks to be 4-5x, raising the firepower to c.€1
tn. If anything, this is a bit smaller than we would have liked (€1.2 tn is
needed to fund peripheral Europe up to June 2013). The issue is quite
how they are going to get to €1.2 tn bearing in mind that once Italy
and Spain are excluded from the guarantees, there is only c.€200 bn
of guarantor capacity and therefore a 20% insurance scheme would
allow €1 tn of EFSF capacity and assuming funds are not used for
other means. The partly funded IMF SPIV is meant to run in parallel. A
lack of detail and implementation risk are source of potential
disappointment. We also need to see some of the guarantees or
purchase of guaranteed bonds coming from outside of Europe
(IMF/BRICs) otherwise it is simply Europe insuring itself and that
would risk a French debt downgrade, we believe.
Greece: it may be insolvent but could be liquid enough to postpone
default for a long time. The details are vague (although the debt swap is
meant to be in place in December and we think the new €130 bn
package would replace the old package), especially on the terms of the
50% reduction in face value of the debt. A 120% government debt to
GDP target by 2020 still leaves Greece with very high levels of
government debt and no doubt this target ends up assuming various
assumptions on growth, tax collection, expenditure cuts and
privatisation receipts- all of which have been missed to date. We believe
that ultimately solvency is not resolved until government debt to GDP
can be seen falling to c.100% with a sustained primary budget surplus.
The participation rate on a 50% haircut/PSI could also be very complex
and a very high take-up is not guaranteed. Remember the problems
with forcing the banks to ‘volunteer’ for the July 21st package.
Bank recap: Roughly in line with expectations but still half of what we
and the IMF had wanted to see (though to some extent the degree of
recap depends on the economic outlook—under the EBA stress test if
GDP growth was minus 0.2% in 2012, then banks would need €230 bn
by 2012). It is unclear how to make the banks avoid reducing their RWA:
it is logical for banks to do this as their cost of equity is c14% and their
loan to deposit ratio is still an extended 135%.
Guarantees on bank liabilities: Some vague positive statement
made on supporting banks’ access to term funding, but again we need
to pay attention to the detail. If the guarantee scheme adds to the
leverage of the EFSF or of Europe, then that further raises doubts
about credit quality.
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