Coppola Comment

It's not going to come from people working more. Excerpt from the IMF's latest Debt Sustainability Analysis for Greece , just released: Oh dear. Quite apart from the negative contribution to growth, the prospect of unemployment taking 44 years to return to something approaching normality is simply appalling for Greece's population. I've looked in more detail at this here  (Forbes). Well, if labour isn't going to drive growth, there's always investment, yes? Er, not really. The outlook for capital investment doesn't look too good either: Yeah, about that financial sector.....Greek banks are still in crisis, it seems. The IMF thinks they will need another 10bn Euros on top of the 43bn they have already received, and even with this, they aren't going to lend. And they aren't worth anything, so can't even be sold to raise money. Greek banks are zombies, and like all zombies, they drain the lifeblood of their victims. They are a serious o...

At Forbes, I have posted the latest episode in the long-running saga of the failure of Hypo Alpe Adria: The story of the  failed Austrian bank  Hypo Alpe Adria (HAA), and its transformation into the world’s worst “bad bank” – the  insolvent HETA  – resembles a Hollywood blockbuster. Complete with a cast of thousands, colorful principal characters, an extraordinary range of special (legal) effects and a reach far beyond its national borders, the HETA saga is long, staggeringly expensive, mind-numbingly complex and at times unintentionally hilarious. HETA’s liabilities are mostly guaranteed by the government of the province of Carinthia. Under its flamboyant far-right governor Joerg Haider, Carinthia provided deficiency guarantees for over 11bn EUR of bonds and subordinated debt issued by HAA. These would be triggered when HETA is wound up, forcing HETA’s losses on to Carinthia and – by extension – on to the Austrian sovereign. But Carinthia’s current government – ...

I wrote a number of posts on Forbes about Russia at the back end of 2014. At the time, there was a lot going on with the currency, the central bank and the banks. So for ease of reference, I've collected them here, in chronological order. Why the Russian Central Bank can't defend the ruble Has the Russian Central Bank thrown in the towel? The Russian Central Bank is regaining control, but for how long? Oil, sanctions and Russian politics How to destroy a currency, Russian style Russia and the banks How OPEC destroyed the Russian ruble Russian ruble: Let it fall, let it fall, let it fall The Great Russian Bank Bailout Why does Venezuela think Russia is its friend? No doubt there will be more in due course. Russia and its problems are not going away any time soon.

And particularly in Europe, as this chart shows: The ratings agency Standard & Poors  has called  for governments everywhere to increase investment spending. It also says they need to improve the efficiency of the spending they are already doing.  Private sector investment spending all over the world fell after the 2008 financial crisis. In Europe, where the crisis started earlier, it started falling in 2007. And it has not recovered. Private sector investors remain risk-averse and fearful of losses, chasing safe havens and unwilling to invest long-term in infrastructure, skills and R&D. When the private sector will not invest, the job falls to government. And immediately after the financial crisis, governments did step up, increasing investment spending as private sector investment fell. Some governments have continued to invest ever since, notably China, which still spends about 8.5% of GDP every year (much of it outside its borders), and India, which...

(But that doesn't mean we don't have a problem). Deutsche Bank has frightened everyone by  warning that  if China sold substantial quantities of US Treasuries (USTs) to support the yuan, this would amount to a substantial tightening of US monetary policy. The reason why China accumulated USTs in the first place was because of its trade surplus: The excess of exports over import sucked dollars into China, where the People’s Bank of China (PBoC) exchanged them for domestic currency (yuan). The PBoC therefore acquired large amounts of dollars, which it stored in the form of USTs. By doing so, it took USTs out of circulation and returned to the world economy the dollars that had been sucked into China. This can be regarded as a form of dollar quantitative easing (QE). Therefore, Deutsche Bank argues, if PBoC sells its USTs, this amounts to undoing QE. But it’s not that simple..... To read the rest of this Forbes post, click here .

At Forbes, more on Russia's currency problems: After the Central Bank of Russia (CBR) established free float with the condition that it would intervene to protect domestic financial stability, the ruble immediately rallied , but then fell again. Many people forecast dire consequences . I admit I was a little worried, but I thought the ruble would stabilize once markets became used to the lack of routine intervention from the CBR. After all, the whole point of allowing a free float is to enable the currency to find its own level – and more importantly, restore control of monetary policy to the central bank. When a country operates a fixed exchange rate system, it de facto adopts the monetary policy of whichever country issues the currency to which it pegs its own currency. In the case of the ruble, that is the United States. And as I have noted before , because China has large US$ reserves and a currency peg to the US$, the Fed’s policy is to a degree determi...

Bulgaria's Corporate Commercial Bank. Again. Oh dear. There is some good news: The Bulgaria National Bank (BNB) has now – belatedly – revoked the banking license of the failed Corporate Commercial Bank (KTB) and commenced bankruptcy proceedings. This will come as a huge relief to insured depositors, who will get their money back in time for Christmas. It also means that the attempt by a consortium of investors to rescue the bank has failed. But what a mess has been left behind: The BNB’s disclosures about KTB reveal the desperate measures that were taken to preserve the illusion of solvency in the months before its failure. This statement from the BNB’s website explains how the bank self-funded its own Tier2 capital with a complex web of circular lending transactions involving an investment company called TC-IME and a host of smaller intermediary companies. The ownership of the components of this tangled web requires some explanation. Indeed it does. Read ...

Two pieces (so far) at Forbes on the Russian central bank's desperate defence of the ruble. Well, it appears desperate, anyway. But is it, really? Firstly, I explain why the Russian central bank can't defend the ruble and shouldn't try to: When a currency is rising in value due to capital inflows, the central bank can cap its rise by buying assets and foreign currency. This is what the Swiss central bank has been doing for a few years now. Its purchases of Euros amount to possibly the largest QE program in the world relative to the size of its economy. Since it can create infinite amounts of Swiss francs, it is unquestionably the most powerful player in the Swiss franc market, and no market participant will oppose it. Instead, market participants will happily co-operate with it by selling Euros at the price that it sets. Similarly, when a currency is falling sharply in value, the central bank can support it by selling assets, including foreign currencies. But...

Never pick a fight with a central bank. The only one who gets hurt is you. Unless, of course, you are another central bank. Central banks routinely intervene in the markets to influence the prices of assets, commodities and currencies. That’s the way monetary policy is conducted. It’s the principle behind QE. Generally, everyone co-operates..... Have you ever wondered why they do? In this piece at Forbes I use a game theory explanation for the ability of central banks to manipulate markets, and apply it specifically to the Bank of Japan's exorbitant QE commitments. 

At Pieria, I deliver my verdict on the EU's stress tests. The ECB did a good job with the AQR, but the EBA's stress tests were not stressful enough . And then I turn my attention to the UK's forthcoming stress tests. On Forbes, I complain that despite the Bank of England's intention to make its stress tests both more severe and more realistic, it fails on both counts. The UK's stress tests are just as flawed as the EU's . Oh dear.

The latest in the Bulgarian bank saga. The audit report on Corporate Commercial Bank is out. It's very grim reading, but does that mean the bank will be closed down? Not necessarily..... Find out more here . (Forbes)

Two posts that centre on the troubled Austrian bank Hypo Alpe Adria. For a small bank in a small country, it is causing an AWFUL lot of trouble. Firstly, the ongoing saga of HAA's Balkan network, which the Austrian government is attempting to sell. As the bidding enters its final stages, it becomes apparent that the eventual owner will be determined more by politics than money: The present tension between the EU and Russia creates a difficult dilemma for the Austrian authorities. On the one hand, they should get the best deal for Austrian taxpayers, which would imply that they should accept the higher bid even though it involves a sanctioned Russian bank. On the other hand, allowing a sanctioned Russian bank to buy financial companies in the Balkans would seem contrary to the spirit if not the letter of EU sanctions.... Despite my earlier warning , a consortium backed by a sanctioned Russian bank is still in the running to buy HAA's Balkan network. Read about it h...

This post is about the US, obviously - though the same considerations apply in the UK as well. The Fed’s large-scale asset purchases (LSAPs, popularly known as QE) have been tapering off for some time now and are expected to end this month. But even though the Fed won’t be making any new purchases, it will still have the largest balance sheet in history. All the securities it has purchased in three rounds of QE and Operation Twist are sitting on its balance sheet. And the banking system is awash with the excess reserves created as a consequence of those purchases. It is clear now that monetary base creation on this scale does not cause runaway inflation, as was feared by many. And it does appear to have prevented the US from experiencing severe deflation in the aftermath of the financial crisis. But as the US economy recovers, the question arises whether the Fed should start shrinking its balance sheet – unwinding QE. So should it unwind QE, and if so - how? Read on ...

Though I'm not sure that's quite what he meant. And I don't think his audience understood it either. But it's the implication of his latest freeze on working-age benefits....... "The UK's Conservative Party, like its Labour Party and most of the media, is obsessed with deficit and – ultimately – public debt reduction. Never mind dreadful productivity, falling real incomes, high private sector debt burdens, under-employment and inadequate investment: public sector borrowing is THE economic problem of our time. The deficit is TOO HIGH. Public spending MUST BE CUT. And George is the man to do it. "Osborne informed the Conservative Party Conference that, if re-elected, he would freeze working-age benefits for two years. Assuming inflation remains positive, this means a real-terms cut in benefits not only for the unemployed, but also for those in work who are receiving a range of benefits including earned-income tax credits, housing benefit and child ...

Austrian banks have developed extensive lending networks in Central and Eastern Europe since the fall of the Iron Curtain. Most of them face deteriorating loan books and falling profits due to difficult economic conditions in Central and Eastern Europe, exacerbated by the Ukraine crisis. But none is more exposed than Raffeisenbank.... Read about Raffeisenbank's Eastern European woes here . There's an update on Erste Bank's Hungarian problem, too.

By "Delinquent Banks", I mean banks that have been fined and/or prosecuted for regulatory breaches and financial crimes. Today's Delinquent Banks are Barclays. They are is of course seasoned delinquents, having been fined numerous times for various crimes and regulatory misdemeanors. But then so are all banks of any size. So what exactly have they done this time? Read on here . Financial Conduct Authority building, London. Photo credit: FCA

Q . What further monetary easing measures do I expect the ECB to announce? A . Maybe a few basis points off interest rates. Q . Will they announce QE? A . No. Q . Why not? A . Because the ECB needs the Germans to co-operate, and at the moment they aren't co-operating. There's a fuller explanation at Forbes here . And the deeper story behind Draghi's Jackson Hole speech at Pieria here . Depressing.

Another in the Bulgarian banking series at Forbes. Two months on, CorpBank is still closed and there is no end in sight. Depositors are angry, bondholders are nervous after the bank's recent default, and the Bulgarian authorities are making increasingly desperate attempts to find the money to reimburse depositors and - perhaps - recapitalize the bank so it can be reopened. Meanwhile, Tsvetan Vassilev, the bank's majority owner, is in hiding after an international arrest warrant for him was issued on charges of embezzlement. And Delyan Peevski's power base becomes ever larger.... Read the article here . Depositors protesting about CorpBank's closure. Picture credit: Novinite

From Forbes: The US oil company Cobalt International Energy Inc. has been issued with a Wells Notice by the U.S. Securities and Exchange Commission in relation to its operations in Angola. The Wells Notice formally warns Cobalt that it may face enforcement action for breaches of “certain federal securities laws”: In connection with such investigation, on the evening of August 4, 2014, the Company received a “Wells Notice” from the Staff of the SEC stating that the Staff has made a preliminary determination to recommend that the SEC institute an enforcement action against the Company, alleging violations of certain federal securities laws. In connection with the contemplated action, the Staff may recommend that the SEC seek remedies that could include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest and civil money penalties. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the Company the opportunity to provide its r...

Continuing my Forbes series on the mysteries of banking in Eastern Europe: The Hungarian banking system has been a thorn in the Hungarian government’s side for quite some time. A large proportion of it is foreign-owned, which makes it more likely that there would be outflows of capital and restriction of essential lending activity in a crisis. And, of course, it’s more difficult to coerce foreign-owned banks into doing things that the government wants, such as cheap lending to favored borrowers and buying up government debt Not only are many of its banks foreign-owned, they lend foreign currencies too. A high proportion of Hungarian mortgages are in euros or Swiss francs. Banks extended foreign-currency mortgages to Hungarian households at a time when the exchange rate to forints was favorable. But since then the international value of the forint has fallen, mainly due to a sustained period of monetary easing by the Hungarian central bank. This has improved economic conditions but ...