Bending the rules

Don't call it a bailout

When is a bailout not a bailout? The semanticists and financial engineers were hard at work over Christmas searching for a way to allow the Italian government to do what is theoretically forbidden by EU statute. What they came up with was a "Precautionary Recapitalisation" of Monte Paschi.

After the too-big-to-fail palaver of the global financial crisis the European Commission decided that taxpayers - especially German taxpayers - should not be first in line to bail out failing banks. Before that can happen, at least eight per cent of creditors must take a hit. Most of those creditors will be covered by the EU-wide scheme that guarantees deposits up to €100k or equivalent. So the burden is supposed to fall on institutional investors and those holding bonds issued by the bank, a process known as a bail-in. The problem in Italy is that some of those bondholders are retail-level savers.

Admittedly, most of them will not be widows and orphans. Only 1 in 20 Italian households owns bank bonds and research by Bloomberg indicates that those households are typically twice as wealthy as the national average. Even so, the government fears the political fallout that would result from hitting voters directly in the wallet, hence its desire to finance a bailout from the overall budget. Except bail-outs are not allowed, so the government is investing up to €10bn in a Precautionary Recapitalisation of Monte dei Paschi di Siena.

Ticking over

While the Italians were refining their circumlocution and Britons were sleeping off a surfeit of festive cheer financial markets in Tokyo and New York were in full swing. Well, maybe not full swing but they were at least open for business, should anyone have wanted to do any. Few did.

Turnover was low and ranges narrow. Between Friday morning and today the outliers were the South African rand, which strengthened by 0.8% against the pound, and the Canadian dollar, which fell by a cent or -0.6%.

Sterling was just about unchanged against the US and Australian dollars and the Japanese yen. It was flat, as near as makes no difference, against the other dozen most actively-traded currencies. Data released on Tuesday showed an improvement in US consumer confidence and a 5.1% annual increase in US metropolitan house prices.

More of the same

This intra-holiday three-day week is unlikely to bring much in the way of currency excitement. There are no big-ticket ecostats on the agenda and none of any consequence from the UK. The seasonal lack of liquidity allows for the possibility of spikes and troughs.

The Japanese figures this morning looked good: Industrial production increased by 1.5% in November and retail sales were up by 1.7% from the same month last year. 

European data before lunch cover Spanish retail sales, Italian consumer and business confidence and British Bankers' Association mortgage approvals. This afternoon brings US pending home sales and the weekly API measure of US crude oil stocks.