Mint – Blain’s Morning Porridge
All these moments will be lost in time...like tears in the rain...time to die.
Last night's “surprise” OPEC (Organization of the Petroleum Exporting Countries) agreement to agree to agree about talks on cutting oil production is fascinating. Not because of the likelihood it might not ever happen (the earliest we will know is the Vienna meeting in November), but for what it tells us about how the sands are shifting around Saudi Arabia. Deliberate Saudi over-production caused the oil glut and was a policy designed to take out expensive US producers. Voodoo economics didn’t work – US producers cut and adapted, and the rest of the world hasn’t played along.
Last night’s agreement represents a fundamental shift in Saudi – a wake up and smell the camel-waste moment. The result is the kingdom is suffering rising twin deficits amounting to over 20% of gross domestic product. As global oil revenues have tumbled on the back of crashing prices, Saudi faces a cash and spending crisis for which it’s largely unprepared. Social issues are mounting. The “salaries” of the elite have been slashed. It’s being forced towards the international debt markets – a massive deal is on the new issue stocks. My colleague Martin Malone expects to see the debt/GDP ratio rise from 15% to 50%. This is a picture we’ve seen before.
While Saudi won’t become Venezuela overnight...are there parallels? Perhaps. Meanwhile, last night’s overturn of Obama’s veto on US citizens suing Saudi over 9/11 is very interesting – and potentially further trouble.
However, it does sound like Iran and Saudi are going to try to co-ordinate on oil supply. Despite the fact these two very different nations will disagree on absolutely everything, it’s in their mutual interest to do so. Oil analysts expecting a $10 per barrel rise in prices are pinning their hopes on Sunni/Shia rapprochement.
I’ve been looking at some research suggesting a seismic shift in Middle East investment into the US as a safe haven on regional fears that said rapprochement won’t happen – meaning Saudi can’t just assume the global investor base will blithely fund its coming debt binge. That adds pressure on them to play nice with other pariah states, including Russia and China. And even the Iranians.
Or, other commentators suggest the big Middle East funds – the sovereign wealth funds – could be obliged to channel funds to Saudi to preserve regional stability – therefore liquidating current US holdings. Swings and roundabouts indeed.
Meanwhile, ECB President Mario Draghi was in “robust” form yesterday telling Europe’s languid political classes about the need to do more in terms of structural reform – yada, yada, heard that one before - but also the need for other policies to boost recovery in Europe. Optimal fiscal policy? That’s an interesting call.
The likelihood of banking embarrassment in Germany means his comments about banks being able to operate successfully in zero interest rate environments were particularly elucidating. Let’s see...if interest rates are zero, then borrowers don’t pay any interest and can extend their loans indefinitely? Then banks can’t have any non-performing loans, and will therefore be absolutely default-free? Suddenly I understand.
ECB negative interest rate policy is absolute genius. European banking is fixed and nothing to worry about. (US readers – massive sarcasm alert!)
My day started in the Bloomberg studio where I was somewhat surprised to read a comment that Deutsche Bank is “healthy”. Right. I’m not sure I buy that.
Banks are enormously complex beasts. They are not simple businesses. To turn around a bank is complex. To reinvent a bank – which is what Deutsche Bank, UBS, Credit Suisse and others are desperately trying to do, is one level below impossible.
Earlier this year we had commodities firm Glencore teeter on the edge of disaster. Swift action, clear plan, and it’s back from the brink. That is not going to happen with banks. In my 30 years of markets I can’t think of a single bank that’s got in trouble that has staged anything like a similar comeback. Once a bank catches a cold, it often develops into dangerous pneumonia.
Deutsche – and the others – are anything but healthy. The need to reinvent. The newsflow yesterday was positive-ish. Rumours of a sovereign wealth fund capital injection, rumours of a domestic rescue plan, but the reality is more likely to be further deterioration. If that develops into a full crisis any rescue will come at the cost of contingent capital deals being triggered (which will send shock waves around banking confidence) and the strong/inevitable bail-in of senior debtholders.
Others say the senior debt is safe. Delighted they think so. Call me and tell me how much you want to buy?
Out of time..
Head of Capital Markets/Alternative Assets