Awful Weather

The weather in London has been ghastly for the past couple of weeks and, despite the promise of rain, the “summer” shows no sign of ending today.

I hate the summer. One of the ways I think about trading is to think of myself as a mental athlete. This is not to imply that I am a good one, of course — the parallel is with any professional athlete. I think of my daily tasks as a training programme, and the restrictions I place on my life as being analogues of the restrictions that athletes have to put up with. It is in this context that I dislike the summer. I have mild hay fever; and like everyone, I am drained by the heat and find it difficult to sleep. These are unwelcome disruptions to my training programme.


Bankia’s request for aid on Friday, and the Spanish government’s decision to inject EUR 19bn of capital (seemingly in the form of government bonds) has caused consternation in the newsflow. I presume that the plan is that Spain would issue bonds in return for equity in Bankia, rather than cash — thus, the recapitalisation would partly work as an accounting exercise that would render explicit a portion of the Spanish government’s implicit guarantee of the country’s banks. It would also, however, provide collateral that Bankia could use to borrow actual cash from the ECB. Given that Spain’s debt/GDP ratio remains relatively low, this does not strike me as an especially bad plan, and indeed, Spain could probably repeat this trick in order to recapitalise its entire banking system without its debt/GDP ratio becoming unmanageable. If it were me, I would be inclined to issue long-dated bonds to the bank, on the basis that 1) the market might see the eventual redemption as being too far away to worry too much about and 2) I might be able to sell my stake in the banks before the bonds came due.

Mr. Rajoy has been calling recently for the ESM to be allowed to recapitalise banks directly, rather than via national governments, and I expect that this amendment would come if it were needed. Thus, there are two clear routes out of the crisis for Spain. One is recapitalisation of the banks by the Spanish government, which looks to me like a sound plan; if that fails, then the EU can move to the second route, which is to change the terms of the ESM.

I have said all along that the worry about Spain’s banks had a clear solution and that the problem was far from intractable. This even led me to go long risk assets after the markets had reacted to Spain’s widening credit spreads. My mistake was to underestimate the impact of the Greek election; but I do not see any reason to change my view on Spain.

Bundesbank as Mad as Ever

Mr. Weidmann has recently said that he did not think the Eurosystem should increase any further its exposure to Greek banks. This appears to be a rejection of emergency liquidity assistance (ELA), which is lending by a national central bank — in this case, the Bank of Greece — supposedly at its own risk (though in practice this doesn’t make a lot of difference). The FT’s Money Supply blog speculates that there may be an argument going in inside the ECB, with the Bundesbank effectively making the case for Greece to be cut loose. Happily, it takes a 2/3 majority on the Governing Council to stop ELA, so the madness would have to spread for this to happen.


  • Japan household spending 2.6% YOY b.e. Apr. Fell back from last month, but the third strong YOY number in a row. This was largely due to the YOY comparison, however. In April 2011, the index was still in its post-earthquake trough. The spending index surged in February and has since given back about half the increase.
  • Japan unemployment rose to 4.6%, d.e., Apr.
  • Japan retail sales 5.8% YOY d.e. Apr.

Coming Up

  • US Conference Board consumer confidence
  • Australian retail sales