Sunday, July 01, 2012

Peering Under The Coin

I tweet not. Half because I constantly doubt the certitude of my own thoughts so if I am to expose to scrutiny, I feel the need to accompany them develop with their underlying structure. And half because I can never remember my frickin' password. That said, JCK over at Alea is parsimonious with words, and lets the subject speak for itself. Apart from being direct, and to the point, it is much more economical with one's time.

He posted two quite interesting things this week, worthy of scrutiny.

First, a long term chart of German Banks' foreign asset holdings with the tagline "Guess Who is Being Bailed Out".  Like the Japanese, once an activity is approved and adopted, Germans doing it till the proverbial cows  home, or one's metaphoric chickens come home to roost (or become roadkill). Though one may question the strings, one certainly cannot accuse them of recycling surplusses. Turning the bailout question question on its   head is a useful exercise. And while the Greeks are focus of many's wrath, and butt of most jokes, Asymptosis takes some tongue-in-cheek pot shots at the stereotypical PIGS depicted by Shorts and the conservative media in this post entitled "No, The Greeks Aren't Lazy..." , a follow-up to a similar 2011 comparison of the European's cup Semifinal matchup entitled "Hard-Working Germans vs. Lazy Italians? Not So Much". No, he is not an apologist for historical policies, and nails the cause (relative differences in productivity) and the primary reason (huge historical and ongoing German preference for machines over men), though doesn't weigh in on whether this is cultural ('vorschprung durch technik' fascination? ) or the result of historically-high relative wages and employment rigidities of German labour, or the representation of of workers on corporate boards who encouraged investment to stay competitive vs. the alternative...i.e. permanent loss of employment. I think the posts are important in counterbalancintg the prevailing and increasingly voiciferous pejorative view of the PIGS being lazy, feckless, and somehow morally inferior.

Second, JCK posted a chart of EU 27 Mortgage Debt as % of GDP By Country along with a few non-Eurozone comparisons (and the USA). As a man of few words, JCK highlights Italy ostensibly for comparison, and here again relevant to the points made above. By this measure, Italy is anything but  profligate (~17%). They seemingly own their homes and farms nearly free and clear. Banks - however much the market may hate them for their investment in the sovereign bonds of their government, is not on the hook in this regard. Nor are French banks as anyone who as ever tried to obtain a mortgage loan from a French bank can attest (~35%).  Greece too comes in just a hair over 30%. Germany at 42% trumps both, though is dwarfed by Denmark at nearly a 100%, the highly-levered UK right behind at 84% and the US at 75% - both latters more than double that of France. Ireland and Portugal are predictably on the tails given the prior real estate bubbles coupled with post-bubble contractions in GDP.

These numbers strike me as interesting for a couple of reasons.  The almost completely unlevered households of eastern Europe, at least as far as Mortgage debt goes, provides upside for capital and future growth. The  relatively low levels of mortgage debt-to-GDP, in individual countries and across the Eurozone are large and meaningful repositories of savings and represent very large intergenerational transfers of wealth - something they will need given the nature of the pay-as-you system of pension funding. The US, one might infer, has much encumberance upon their assets driven by HELOCs, refi at higher asset values and less-stringent equity requirements during the noughties. Similarly, one can look at it as the equity against which the state's claim (particularly within the more indebted states) may be reasonably set against, other things the same. It makes me more sangiune to see this vasst headroom in thehousehold sector - headroom lacking in the US at the household level, but granted at Govt level by the SS Trust Fund. Indeed, the biggest eye opener is in the non-Euro north - UK, Sweden, Norway and Denmark all with seemingly future banking issues given the quanitity of new loans made at highly-elevated capital values following years of median mortgage debt-to-GDP levels at uninflated capital values. Still think that those large and outsized NKR and SEK depos at that Scandi Bank is a safehaven??!?    

1 comment:

Anonymous said...

Definitely interesting to look at bank balance sheets thru that lens. Historically, it always seems like it's the real estate lending and inflated collateral values that setup the Pettisesque inverted balance sheet and subsequent bank crises and credit contractions.

But it doesn't change the fact that French banks' aggregate balance sheet is nearly 40% of total EU banking assets. It doesn't change the fact that even a decently-run and moderately levered banking system (like Greek banks) can go bust if faith in sovereign debt explodes. And it doesn't change the bloated banking assets as % of each sovereign's GDP in countries like Ireland, UK, France, etc when there is no common deposit insurance scheme.

I agree Germany gets off too easily since policy was too easy for the PIGS when Germany was down for the count from 2001-2005. Similarly I think China gets off too easily in a similar vendor finance and beggar thy neighbor growth model. And while I am no expert on EU political economy, I do have to pay attention to what is going on day to day and have learned more about it than I care to the last two years. IMHO, seems to me like they need to decide on whether it will be a full fledged union or not, and they need to do it soon. German banks setting up off balance sheet subsidiaries in Spain and Italy to take LTRO funds to buy sovereign debt while avoiding deval/revaluation risk doesn't exactly strike me as closer integration.