Brendan Keenan: Market gets the jitters at first sign of ECB steps to regulate support
JUST a little touch of frost and there they all are, skidding and crashing. Not just Irish motorists either, but Europe's banks. The touch of frost in this case is the beginning of a withdrawal of emergency support measures by the European Central Bank.
A "touch" is all it could be called. The ECB will merely stop giving banks unlimited 12-month loans and, from March, will demand first-class credit ratings from two agencies on any assets it accepts as security for loans to banks.
Yet this was enough to put the shares of several banks on the slide. There was a deal of pandemonium on the Athens stock exchange. Greek banks have borrowed even more, proportionately, from the ECB than Irish ones.
Things have been a bit less dramatic here, but Irish measures of financial confidence are well off the recovery peaks of late summer. Share prices in the two big banks are about half the levels of around €3.50 seen earlier in the year.
More worrying, in some ways, is the rise in interest rates on government borrowing and the costs of insuring those borrowings against an Irish government being unable to repay.
The interest rate rise has been partially hidden by the success of the National Treasury Management Agency (NTMA) in borrowing over €30bn this year at steadily declining interest rates. But the ECB emergency measures have had a lot to do with that success.
Irish banks contributed a significant part of that €30bn in new loans. They are then able to borrow the money back from the ECB, using the NTMA bonds as security. The ECB charges 1pc, in line with its emergency interest rates, but the NTMA is paying up to 5pc to the banks. It is a nice little turn, to say the least, and is bound to help keep down the rate which the NTMA has to pay. In the markets where government bonds like these are traded, the difference between the rate on NTMA bonds and German government ones has climbed to 1.7pc -- back to where it was in July.
The alarms and excursions are not just about what the ECB has done so far. Markets are looking ahead to what comes next. Banks may not be able to borrow as much from the central bank as they can now, and will have to seek what they need from markets which are still wary about lending to banks.
Trouble
In turn, governments may have to pay more for what they borrow, as the ECB "middle man" departs the scene. That spells trouble for heavily indebted countries, in particular Ireland with its huge budget deficit, and a rising interest cost on bonds from NAMA (National Assets Management Agency), as ECB rates themselves eventually start to go up.
It might be argued -- indeed it is argued -- that this all shows that it is far too early to talk of lifting the emergency help for banks and economies. If even the threat causes such perturbations, any serious reversal would induce a second recession and banking crisis, the argument goes.
The stakes are very high. They were outlined by Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), last month. Voters in the democracies would not stand for a second rescue, he said, partly because of bankers' refusal to mend their ways and partly because it would be simply unaffordable.
So Mr Strauss-Kahn is in favour of removing assistance slowly and carefully. But an unexpected problem has arisen. There are signs of another property and asset bubble, believe it or not. It is happening in Asia, rather than the west, but that does not mean Washington and Frankfurt can ignore it. The same forces are at work, and the same contagions could hit financial institutions wherever they are.
Among those forces are very low interest rates in some places compared with others, and an irrational mix of currency regimes, with some floating and some -- especially the Chinese yuan -- pegged to the dollar. All of this presents attractive opportunities for international investors. Where once they borrowed Japanese yen and bought high-yielding dollars (the so-called "carry trade"), they now do the opposite.
If the Chinese currency is undervalued, as everyone seems to think bar the Chinese, then Chinese assets are cheap. But how long before they become too dear?
And so on. One reason for worry is that, despite all the talk, nothing much has emerged in the task of making banks less prone to taking excessive risks. Splitting banks into safe and risky ones looks impractical, if not downright useless. New regulatory rules which would limit the risks they take will be fiendishly difficult to devise, and even harder to agree on an international scale.
If one person can be said to have got this right, it is the international financier George Soros. Unfortunately for him, he will forever be associated with forcing sterling out of the European monetary regime in 1992. But, while playing the markets may have been his trade, he warned in a series of books from the 1990s that those markets are inherently unstable and dangerous.
His last book, published in 2008, showed how dramatically different financial markets have become in the last 30 years. When he began his career, not only were banks much more tightly regulated, but the amount of credit available was much smaller, relative to economic output.
I can recall the reluctance with which Irish banks went into mortgage lending. Indeed, they were not that keen on lending at all. It was just something they had to do with the deposits they truly prized. But I also recall their pauline conversions when they discovered how much money they could make.
Even more to the point, there was very little movement of international capital in that far off world. Actually, no so far off. Albert Reynolds was Taoiseach when Irish citizens were first allowed to move as much money as they liked out of the State.
There is no going back to that era. Besides, a lot of legitimate prosperity and growth would be lost if we did. On the other hand, given a global financial system which still appears to carry most of its self-destruction seeds, it is not at all clear that a safe, orderly exit from the present trauma can ever be arranged.
Irish Independent
