tony's blog

Thursday, December 1, 2011

10 days to save the euro!

It’s been a busy week so far. And not in a good way with the continuing global market volatility. And now there seems to be confirmation from No 10 that we’ve entered a new credit crunch after the world's major central banks acted in concert to provide money to the creaking financial system. And in the midst of governments and central banks doing their best, Olli Rehn, the European Commissioner for Economic and Financial Affairs, said: "We are now entering the critical period of 10 days to complete and conclude the crisis response of the EU." Accurate but not comforting. Or helpful necessarily.

It’s frankly difficult to keep up with markets and their reaction to news coming out of the eurozone. We have seen significant recent falls on stock markets which have been massively reversed this week following the concerted intervention of several central banks including our own Bank of England. One can’t help feeling that the markets are overdoing the euphoria and that this is probably driven as much by short-term position and profit taking as anything else. I fully expect this to reverse out again in due course since nothing that is being done is addressing the core problems in the market. Nor is it meant to. It is lubricating the markets and buying time for the real solutions to be put in place whatever they are. We wait with bated breath.

In the meantime, we mere mortals in the mortgage markets have to try and interpret events. The residential mortgage backed securities markets had been making good progress in their recovery with an increasing number of issues and the re-emergence of seasoned issuers such as Paragon for the first time since 2007. By my reckoning there have been 11 issues in the first 6 months of the year and 12 so far since the end of June. So it was disappointing to hear that Kensington have once again had to pull their deal because pricing had been unattractive. I sympathise with them enormously but their woes should be seen in the wider context of the markets and the global lack of liquidity rather than Kensington specific.

I would argue that UK RMBS still represents good value to investors. S&P data up to the end of Q2 this year shows that there have been no UK RMBS defaults thus far and less than 10% downgrades. This compared with more than 10% defaults and over 40% downgrades in the US market.

But without investors willing to invest in bonds on a cost effective basis, it is not possible to use RMBS to fund mortgages on a commercially viable basis.

What does this mean in practice? Well I think it means that mortgage pricing is going to firm up in response to increased funding costs and increased capital requirements.

And it is impossible for the time being for specialist lenders to rely entirely on securitisation as their core funding mechanism.

Not looking good.