Lafferty daily briefing

Theresa’s May’s joyless campaign for a stronger hand in Brexit negotiations with the EU lies in tatters this morning after the British electorate decided that the opposition’s anti-austerity politics looked positively cheerful compared to May’s. With the votes counted and a hung parliament in the offing, the result produced no clear direction for the country, and another election may be on the cards within the year. The Labour Party will be looking at the shambolic performance of the Conservatives, and the inability of British media to swing the election to the Conservatives, and thinking they will be in with a big chance the next time around. But how does all of this impact on the Brexit negotiations? Several of the prime minister’s declarations (“Brexit is Brexit” and “No deal is better than a bad deal”) are now toast. London media mused this morning that the bureaucrats of Brussels will be chortling with delight at the outcome, but that’s a paranoid vision. It’s more likely that Jean-Claude Juncker and the EU will be shaking their heads at Britain’s maverick behaviour, and praying that the next leader they face across the negotiating table is not Boris Johnson, who may in fact inherit the leadership. The Brexit calendar just got longer.

While all eyes in Europe were on the British election, the US House of Representatives made some headway in repealing the Dodd-Frank Act. Like many of the proposals made by President Trump’s administration, this repeal has turned out to be a lot more complex than hoped. After jettisoning some of the more controversial aspects of the reform, such as the removal of Durbin Amendment, the Financial Choice bill now proceeds to the Senate, which is likely to push back further. The bill is sponsored by House Financial Services Committee chairman Jeb Hensarling. Bloomberg reports: “‘Hopefully, the nightmare of Dodd-Frank will be gone soon,’ Hensarling, a Texas Republican, said in an interview on Thursday. ‘Of all the regulations that were imposed on our economy in the Obama era, Dodd-Frank was the worst. In the House, we just threw it off. The animal spirits of free enterprise can roam yet again‘. The legislation is part of the deregulatory agenda that has swept through Washington since Trump’s election win. In the coming days, the Treasury Department is expected to release a report that will add to the push by laying out recommendations for cutting back what Republicans see as red tape that was wrapped around banks after the 2008 crash.”

Just as countries with ‘Democratic’ in their titles usually are not, ‘Popular’ has become an unfortunate name for a bank. For months, the Spanish government has been ‘encouraging’ its biggest banks to buy out Banco Popular, which was saddled with GFC-era non-performing property loans. Papers this morning are praising the cool of Ana Botín, who apparently deigned not to answer the calls of Popular’s ill-fated executive chairman Emilio Saracho for several weeks, waiting instead until the Single Resolution Board stepped in and handed Popular over to Santander for the symbolic price of one euro. In the end, Banco Popular ran of out road, when the ECB decided the bank could no longer offer security of sufficient quality to qualify for funding. On the one hand, Popular’s share price was plunging, and on the other hand, depositors were pulling funds so fast that the bank reportedly burned through €3.6 billion on Monday and Tuesday this week. “But Popular investors are furious about a catalogue of errors by Saracho,” writes the FT, “particularly his public admission in April that the bank needed fresh capital or to be sold, without having a solid plan in place for either. He won’t be cheered at his most recent alma mater either. Apparently, he’d lined up [JPMorgan] to run a Popular sale but the intervention of regulators to ‘resolve’ the bank and hand it to Santander for free scuppered that mandate. At least it all ended well for his earlier employer (yes: Santander).” On the surface, this was a successful resolution: there were no photos of lines of depositors waiting anxiously outside the bank, Northern Rock-style, but it remains the case that Banco Popular is not the only European bank close to the edge. A bank resolution won’t be so easy in neighbouring Italy, where many retail customers are also junior bondholders, who would be wiped out by a Banco Popular-style denouement.

Italy is in fact in a dilemma of its own, and some similarities are playing out. The Italian government has turned the whole mess over to UniCredit CEO Jean-Paul Mustier — Italy’s equivalent to Ana Botín — who is charged with rounding up enough cash from Italian banks to save the day. Injections of cash from other banks would allow an Italian-style rescue of regional lenders Banca Popolare di Vicenza and Veneto Banca, which are saddled with a big chunk of the non-performing loans that finally did for Banco Popular in Spain. Italy, as noted above, more than Spain, has retail depositors who are also junior bondholders. “Lenders are open to making payments, proportionate to their own size, because the costs of a failure would be much higher,” according to people close to the negotiations, writes Bloomberg. “The cost of refunding small depositors and other eligible creditors is estimated at about €11 billion, they said. The discussions are expected to intensify in the next few days, with a decision expected to be taken before June 21, when a €150 million junior bond of Veneto Banca expires, the people said.”