There is no doubt that the investment world, particularly bubble sectors of finance, need reminding how paper thin the layer of ease and order actually is. The calm created by central banks, and this applies to every jurisdiction with the possible exception of Switzerland (which took its very bad medicine in 2008), is only that. There has been nothing fixed, no actual recovery such as what the word actually means. We only see the constant ebb and flow between periods of stark instability, the contraction followed not by true growth but merely the temporary absence of further contraction.
Fears are rising in France, for example, that the economy there might be falling back into recession. That would be either the second or third relapse since 2009, depending on your definitions.
Then there is the banking system in Europe, papered over by Draghi’s promise of unspecified aid to save the euro. Now Portugal’s Banco Espirito Santo SA is renewing fears of the dreaded word “contagion.” It is only whispers at this point, but missing a bond payment is serious stuff for a banking concern.
The selloff is reawakening concern that the financial system remains vulnerable to shocks as the euro region emerges from the sovereign debt crisis. While the Portuguese government said the nation’s second-biggest lender is isolated from losses in group holding companies, lack of transparency in the corporate structure is disturbing investors.
There is a specific word, made infamous by Bernanke in the early part of the subprime episode, that is making a comeback too, “contained.”
The Bank of Portugal reaffirmed yesterday a July 3 statement that the Lisbon-based bank’s solvency has been significantly reinforced and can avoid risks from the rest of the group. Banco Espirito Santo has been “adequately isolated” by the Bank of Portugal from the financial problems in some entities of Grupo Espirito Santo, Parliamentary Affairs Minister Luis Marques Guedes said on July 3.
For now, the markets in Portugal and Europe are less than impressed with that statement, likely because of how inappropriate its use was during the worst episodes previously. It comes in close succession to the lack of transparency regarding the exact nature of the financial difficulties – the greater the dearth of information the more likely “officials” are to forcefully proclaim containment. Confidence of exactly that would be much more consistent with open honesty of all that might be wrong.
As with Austria’s Erste Group, these are reminders that not much has actually been done toward addressing the massive financial imbalances in Europe, though “extend and pretend” was never supposed to do the heavy lifting. That was left to robust growth which was expected long ago. The failure to achieve such a trajectory has left this aching hole that has only been covered via encouraged asset inflation. It is a thin veneer not much suited to even small “tail” events.
Whether or not Erste or Espirito reignites another bank/currency crisis is beside the point here, though that cannot be discounted no matter the official statements otherwise. Instead, this is another “helpful” reminder that the “resiliency” that is being bandied about as a description for all that central banks have created recently is as hollow as all those proclamations of recovery. Bond yields used to have some relation to solvency, that they do not anymore is a serious problem that persists, ultimately as a drag on everything (just ask Japan).
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