Europe’s Uphill Stress Test Treadmill
The ECB offered a first EUR 400 billion slice in 3-year targeted liquidity on a path to reflating its balance sheet toward the crisis-high EUR 3 trillion as it prepared to release major bank asset quality and stress test results toward more credible reception than the last repeated exercise. Southern EU members are expected to fare worst in the assessments and seize upon the new lending facility despite poor borrower demand and GDP growth. Greek stocks are down 5 percent on the MSCI as banks with 50 percent NPLs may need additional recapitalization beyond the remaining Troika pool as the program winds up with hundreds of actions uncompleted. The new Finance Minister trumpeted another successful bond placement and projected marginal output improvement this year but the ruling coalition has relaxed tax burdens heading into presidential voting which may undercut the primary budget surplus as the main adjustment outcome. The geopolitical east-west showdown has also intensified as Ukraine formally ratified the EU trade and association agreement with a year delay in a nod to Moscow with a tentative cease-fire in force around Donetsk. President Poroshenko traveled to Washington afterward to seek additional bilateral and multilateral economic and military aid as IMF forecasts this year deteriorate from the original grim prognosis. The debt/GDP ratio may be close to 70 percent with the currency’s slide against the dollar at half that figure, eroding sustainability but also potentially triggering automatic repayment of the $3 billion 2-year bond Russia and deposed President Yanukovych agreed at end-2013. Naftogaz arrears may be twice that amount as arbitration has yet to settle the dispute and its own $1.5 billion borrowing soon comes due. Private analysts put GDP contraction in double digits as benchmark sovereign yields jump toward 15 percent on restructuring odds which have heightened with the Fund’s embrace of early maturity extension in crises. The stock market up over 20 percent on the MSCI frontier index has been a safe haven, while neighboring Baltic and Balkan exchanges have slumped indirectly.
Russia has been the EPFR outflow leader with a 15 percent MSCI loss, multiple government bond auction failures, and a ruble plunge toward 40 to the dollar. The central bank has conducted swaps but paused on rates as it predicts barely positive growth and high single digit inflation with food import restrictions and currency depreciation. State banks Sberbank and VTB are both under tightened international borrowing sanctions with retail deposit expansion flat. Officials announced an emergency fund to offset external cutoff and oil giant Rosneft has already asked for $40 billion. The two are chief lenders to a major gold company seeking debt relief and blue-chip client doubts were further reinforced with the arrest of conglomerate Sistema’s founder on money laundering charges. To avoid the crackdown credit and capital market application has turned to Asia and Hong Kong in particular, but investors are preoccupied there with China’s surprise monetary injections to big banks and the onset of Shanghai cross-trading on the equity “through train” which previously derailed.
