The news came on the sly, when the European stock exchanges began to discount declines over one percentage point. The mixed closure of Wall Street and the negative ones of the Asian markets, however, seemed to justify it all: the markets reacted with disappointment to the Fed’s moves, perhaps hoping for an increase in the volume of Qe purchases and not just in an extension of three years of the current interest rate. In the intentions of the ECB and its Governing Council, however, there was more to justify the latest emergency move in terms of banking supervision: the temporary exclusion for systemic institutions in the Eurozone of the exposure to the Central Bank from their leverage ratio. Or, assets will not be included in that meter such as coins, banknotes and the same deposits held at the Central Institute. A purely technical move, but decidedly political and substantial for the budgets for the so-called G-SIBs (Globally Sistemically Important Banks) and the subsidiaries of foreign banks operating in the Eurozone. And what makes us think is the fact that, despite the low profile chosen to communicate the decision, the Eurotower did nothing to hide the emergency nature and of the exceptional nature of the umpteenth exception granted: “Exceptional circumstances related to the coronavirus crisis”.
Why then the exception just communicated will it remain in effect until June 27, 2021? It looks like a already seen of the Fed’s promise to intervene only for two weeks in order to rebalance the repo market in September 2019, and then institutionalize the auctions until late spring. Covid is now Linus’ blanket. Good to justify everything and the opposite of everything, given that the escalation of new infections and the risk of other lockdowns have been known phenomena for weeks. Also because on 10 September, at the end of the ECB board, Christine Lagarde made no mention of the new critical issue that has just been answered. And why is as simple as it is troubling. The day following the Eurotower Council meeting and the stock exchange closed, Moody’s has in fact communicated the downgrade of Turkey’s rating, an unscheduled move.
In fact, what many have read as a cold attack. And the saber was one of merciless ones, both formally and substantially. The rating agency has in fact lowered Ankara’s credit rating to the never reached level of B2, five steps below the status of junk and equal to Egypt and Rwanda. But that’s not enough, because in addition to the negative outlook, Moody’s has put the load from ninety with the motivation of its decision to intervene: “Possible structural crisis in the balance of payments“. So, something more than the usual cyclical summer currency crisis, due to exposure monster to foreign debt, galloping inflation and the consequent, suicidal policy imposed by the government on the Central Bank, capable of burning reserves with alarming speed, so much so that today it is at a minimum for 15 years. This time the risk is seen as systemic and structural.
These two graphs
show the reaction of the lira / dollar exchange rate to the resumption of trading after downgrade: Mass sales by foreign investors of Turkish banking securities led to a record discount of the same at the valuation level compared to the industrial sector. Never, not even during the European debt crisis of 2011-2012 or close to the 2019 currency shock – when only the billionaire loan from China avoided the worst, in the face of reserves inflated with swaps but in reality now zeroed – had it come to such a level. Of course, the law of the market always remembers two mantras: when the blood flows it’s time to buy and, above all, always buy on the minimum. In fact, those stocks could soon become attractive and experience a record rebound, driving the sector.
In the meantime, however, someone could get hurt. And the identity of the aforementioned is revealed to us by these other two graphs
the first of which shows the level of exposure of the various European banking systems to Turkey, while the second paints the performance of the Spanish BBVA stock on September 16 last year, a drop to the lowest level since 1995 due to the 50% control of the third Turkish bank, Garanti. “They are those typical political decisions well masked by technical interventions“, He lets slip with Business Insider Italia a banking source with thirty years of experience. In short, the ECB – also in light of the trend reversals of the securities of the banking sector on the Madrid Ibex index since late morning – was forced to intervene in an emergency to defend a system whose bailout has already cost Europe a structural crisis and about 50 billion euros. At the time it was the real estate bubble of the Zapatero era to explode in the balance sheets, after the Lehman Brothers detonator had ignited the fuse, today the exposure to Turkey placed heavily on the dock by Moody’s.
Not surprisingly, precisely the boxer’s posture with the investors’ guard down forced the Eurotower to ignore the forms and enter the field with a slippery tackle of those decided, even if disguised and made less rough by the appreciable and forced timing. In short, while the EU Commission outlines magnificent and progressive fortunes for the Eurozone through the Recovery Fund and its guidelines all marked by the great goals of reform, the Central Bank has had to take the field again to plug old flaws that have never really been repaired. There remains a strong double doubt. First, to understand how much the move has really reassured the markets and sheltered, at least in the short term, the most exposed Spanish banks. Second, if unfortunately the Turkish situation worsens, both economically and geopolitically, and this frustrates the quarantine operation from the contagion implemented by Frankfurt, what would be the degree of resilience of the European banking system to a new systemic crisis radiating from Spain (overwhelming in no time the over-exposed and financially interconnected Portugal)?
And the Italian banks, already shaken by fears related to the European regulation on bad loans – defined as “a bomb in the balance sheets” by several parties – and third parties on the Continent for exposure to Ankara’s credit risk, how would they react to new cross-border tensions on assets? One thing is certain: given the far from euphoric level of credit transmission to the real economy recorded in the Eurozone net of the intervention monster of the ECB – between direct purchases and long-term refinancing auctions -, a banking crisis even of a smaller magnitude than that of the two-year period 2010-2012 could potentially strangle in the cradle any cry of recovery linked to the Commission’s plans. At that point, you would really be navigating on sight.
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