Conjoncture
    Conjoncture - 03 December 2018
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    The adoption of IFRS 9 on 1 January 2018 has changed the impairment model for financial assets, which is now based on the recognition of expected credit losses. A more granular analysis of the quality of performing assets, specifically the introduction of an intermediate category, has resulted in significant additional provisioning, curtailing bank equity. Given the already high level of provisions and the mediocre quality of their lending books (although this has since improved), the cost of transition to IFRS 9 raised further questions for southern European banks. Our analysis shows that the costs can be covered, but that they will be proportionately higher for Italian banks than for their Spanish and Portuguese peers. Such differentials suggest that a discrepancy exists between the processes of cleaning up of bank balance sheets.
    Conjoncture - 30 October 2018
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    The debate on risk sharing in the eurozone has intensified significantly in recent years. It is an acknowledgment that the eurozone “house” needs to be made more solid but also reflects the concern about limited policy leeway to address future economic downturns. Risk sharing can be public or private sector based and, within each channel, either domestic or cross-border. Public cross-border risk sharing will have an important role to play in strengthening the functioning of the eurozone. However, the challenge is considerable because it raises questions of pre-commitment, conditionality, moral hazard and governance. Finally, risk sharing needs to be considered together with risk prevention, risk management and boosting resilience.
    Conjoncture - 11 September 2018
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    Mauricio Macri’s government has pulled Argentina’s economy out of isolation. His policies enabled it to swing back into growth in 2017 and to consolidate the central bank’s foreign reserves thanks to the inflow of portfolio investment. Yet these policies also widened the current account deficit, increased the USD-denominated public debt and indirectly generated inflationary pressures. The Argentine government has had to call on the IMF to stabilise the exchange rate. The stabilisation policy will plunge the economy back into stagnation, with an economic cost for the local population due to a very restrictive monetary policy and more demanding fiscal consolidation efforts than the government initially envisioned in late 2017. Considering Argentina’s high foreign currency debt burden, the government faces a classic dilemma of needing to stabilise both the public debt and the external debt.

On the Same Theme

Risk sharing in the eurozone: which way forward? 10/30/2018
The debate on risk sharing in the eurozone has intensified significantly in recent years. It is an acknowledgment that the eurozone “house” needs to be made more solid but also reflects the concern about limited policy leeway to address future economic downturns. Risk sharing can be public or private sector based and, within each channel, either domestic or cross-border. Public cross-border risk sharing will have an important role to play in strengthening the functioning of the eurozone. However, the challenge is considerable because it raises questions of pre-commitment, conditionality, moral hazard and governance. Finally, risk sharing needs to be considered together with risk prevention, risk management and boosting resilience.
With Brexit, the UK loses not one but nine European passports 10/17/2018
The European financial services passport can be divided into nine passports differentiated by type of financial activity. Each passport grants specific rights to the holders, who generally accumulate several passports to cover their customers’ needs. These passports allow the freedom to provide financial services within the European Economic Area (EEA) and to set up branches (and not necessarily locally-licensed subsidiaries). In 2016, 13,500 companies in the EEA benefited from at least one passport. Although the number of passports per activity provides an indication of the potentially numerous legal obstacles to pursuing cross-border activities, it does not say much about the scope or type of financial flows, nor the number of jobs affected by the loss of the European passport. With Brexit, the UK will become a third country. It will have to comply with equivalence regimes, which are granted (or not) by the authorities of each host country for a definite or indefinite period of time.
Europe: The importance of tourism as source of foreign revenues 7/25/2018
The tourism sector directly generates more than 5% of the European Union GDP. The contribution is highest in Spain (11%), Portugal (9%), France (7%) and Italy (6%). The sector employs about 12 million people, or almost one in 10 jobs in the non-financial business sector. In particular, the sector has a high share of female and young workers. In 2016, expenditure by international visitors in the EU on food and drink, accommodation and entertainment amounted to EUR 342 bn, which is about 31% of total international tourist earnings. However, as EU residents also spent on these items mostly in other EU countries, the net travel services in the EU balance of payments amounted to only EUR 26 bn. For some European countries, inbound tourism is an important source of earnings for their local economies. This is especially the case for some smaller countries around the Mediterranean such as Croatia, Malta and Cyprus. By contrast, northern and western European countries have recorded deficits on their travel trade balance.
Non-performing exposures and prudential provisioning: An example 7/9/2018
The common minimum coverage levels proposed by the European Commission and the supervisory expectations of the ECB for prudential provisioning could force certain EU banks to sell off their non-performing exposures. The less favourable the terms of disposal for the banks, the greater will be the losses accounted, over and above provisions. The ongoing cleaning up of the balance sheets of certain banks must continue, but achieving this should not come at the cost of a further deterioration of their situation.
The ECB announces QE end 6/15/2018
The ECB announced the end of QE but lenghtened the horizon of the first rate hike.
The project to remove non-performing loans from the banking system 6/12/2018
The European Commission presented a package of measures designed to reduce the outstanding amount of non-performing loans and to prevent their future accumulation on the balance sheets of member states’ banks. These measures aim notably at facilitating the recovery of the value of loans secured by collateral and at developing secondary markets for non-performing loans. Minimum coverage levels would be imposed on banks for new loans that would become non-performing. The package also provides a technical blueprint for setting up national Asset Management Companies (AMCs), in full compliance with new prudential regulation and new EU rules on state aid. The ECB implements prudential provisioning expectations within the framework of pillar 2 of the Capital Requirements Directive (CRD). These measures and supervisory expectations could force European banks to account more losses. It could put banks in the de facto position of having to sell off their non-performing loans at prices below net book value. The impact could be even more important for banks that would already face adverse conditions. Moreover, the assets removed from bank balance sheets would be simply transferred to another sector that is subject neither to the same prudential regulation nor to banking supervision. Although some banks need to continue the cleaning up of their balance sheets, this objective must not be achieved to the detriment of the EU banking sector as a whole.
Europe, should we be concerned about the recent economic slowdown? 5/25/2018
Europe has seen activity levels slow since the beginning of the year, with economic indicators dipping somewhat. Although the recovery still stands a chance, the atmosphere around it is clearly coming under greater strain.
European Union: Non-performing exposures down by a third in three years 5/9/2018
Non-performing exposures in the banking sector of the European Union as a whole declined for the 11th consecutive quarter, dropping from EUR 1,119 bn in Q1 2015 to EUR 805 bn in Q4 2017. This decline of about a third is notably attributable to the resumption of stronger growth and to the banks’ active management of non-performing exposures outstanding. The environment was also favourable for granting new loans. The resulting increase in the loan outstanding amount helped bring down the ratio of non-performing exposures from 5.3% to 3.6% over the period. With the exception of Greece, the countries with the highest ratios of non-performing exposures reported the sharpest declines of the latter.
ECB: cautiously less biased 3/9/2018
The ECB has dropped its easing bias but the dovish policy tone remains intact: underlying inflation remains subdued and policy is reactive not proactive. Mario Draghi’s insistence on the slippage of the reform effort in 2017, his strong urge to complete the Banking Union and the CMU, his concern about protectionism, etc. help explain the cautious stance of the central bank.
France-Germany: The roots of equity capital increases for NFCs (excluding valuation effects) 2/14/2018
Between 2012 and 2017, French non-financial companies (NFCs) generated 35% less value added than German NFCs, but net annual issues of equities and other share capital (i.e. after repurchases) were nearly five times higher on average (EUR 80 bn vs. EUR 17 bn). This shows that most companies have had no trouble raising funds in France. Moreover, this ranking can be seen regardless of the instrument under consideration (listed or unlisted shares, other share capital). In contrast, reinvested earnings (indicated here as gross savings) were almost twice as high in Germany (EUR 386 bn vs EUR 202 bn, or a spread of 190%), resulting in a much bigger annual increase in equity capital than in France (42% higher at EUR 403 bn a year vs EUR 283 bn). At a time when apparent earnings distribution rates are comparable (50% in France, 46% in Germany), the smaller increase in the equity capital of French companies can be attributed to their lower financial returns.

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