The End Of An Empire And The Risky Banks

It does look like the topic of Brexit is here to stay and England is the black swan that will join the ranks of the former great empires out of Spain, Rome, Greece, Turkey and eventually become that lovely place where King Arthur resided we remember fondly in those moments of romance.

As for becoming the Singapore of Europe, it is a tough call, England being not short of decent leaders although the Brexit champions may just be convenient choices for voters to express their displeasure with the incumbents, no matter who, and the general state of the world today, rife with inequality (that we wrote about last week), the lack of social mobility, choosing to bite their noses off to spite their faces after a long hard campaign last year to retain Scotland, only to lose them soon along with Northern Ireland, an even more painful victory over the decades.

How more evident is that when we have “eight hours after the polls closed, Google reported that searches for “what happens if we leave the EU” had more than tripled.” (

Thus we will have the inevitable disintegration of the British Isles, with Ireland already out, and if we drag out those reports on the Scottish referendum less than 2 years ago, we roughly know where England will stand in a Not So United Kingdom.

The End Of An Empire And The Risky Banks

The week has been a trying time for some of my trader comrades still in the marketplace battlefield, one of them joking that they should really let the British kids vote as well because it is their future at stake and votes should possibly be discounted for the life expectancy of the voter who may not live long enough to rue his choice? Afterall, it would not be good to repeat the mistake of their first referendum to join the EU in 1975.

There is not much point worrying about the days ahead except that it is definitely a good thing for Singapore as a financial centre and a country of preferred residence. On the other hand, we could have more volunteers for the Mars space mission, at this rate, with Trump enroute to the US Presidential elections.

What is more interesting is the immediate price action that followed the black swan vote, wiping out US$ 2 trillion in global stock markets as if another Bear Sterns has collapsed and a wave of defaults are about to hit us, sparking off recessions in Spain and Italy both of which bore the brunt of investor angst, suffering double digit percentages loss while the Footsie Index, ironically, lost the least out of the lot (-3.15%) because some grand logic expects the drop in  the Sterling pound (to its 31 year low) would be beneficial to the UK economy, making her least vulnerable to recession ? Rather ironically, with the impending collapse of the London housing market  in the immediately foreseeable future as Moody’s puts UK’s credit rating on negative watch.

European markets were punished most for their loss of UK with more to come, possibly with France, Holland and Italy now pushing for their own EU referendums ( just 17 years after the EUR was adopted as a “single currency”.

And a big loss it is for the 28 members of the European Union.

The End Of An Empire And The Risky Banks 1


And the biggest losers from Friday’s price action have been the banks, hands down and no questions asked or reasons given except that they are banks and banks vilified.

Ranked losers, we have 1. Unicredit SPA (-23.79%), Lloyds Banking Group (-21%), Societe Generale (-20.57%) and Banco Santander (-19.89%), with Standard Chartered (-2.58%) and HSBC (-1.43%) suffering the least loss.


The mindset is certainly strangely transfixed on the idea of blaming the banks again, the easy preys since the Global Financial Crisis of 2008, and not just the banks but the perceived weaker systemically important banks, the likes of Deutsche Bank, the largest bank in AAA-rated Germany, or Banco Santander, the largest bank in BBB+-rated Spain, or UniCredit, the largest bank in BBB- -rated Italy, which is perplexing, given that these banks are all in the list of GSIB (Global Systemically Important Banks), potentially implying that they are too big to fail, state support warranted.

While I am unsurprised that the Deutsche Bank stock (DBK GR) fell 4% last week, I am slightly confounded by the 4% 1 day drop in the latest DB 10Y USD sub-debt price on Friday (stock price fell 13% on the day). Meanwhile, German govt bonds broke a historic low in yield with the 10Y bund yielding –EUR 0.051% (falling from 0.13% a month ago).

AA-rated France saw their 10Y OAT fall to a record low yield of 0.378% EUR but that did not help BNP’s latest EUR AT1 paper from crashing 3.6 cents overnight to yield over 7% as the stock fell 9.3% for the week. Even safe co-op bank, BPCE (unlisted), saw their latest EUR 10Y sub debt fall in price to yield 2.89% for about 10 years, a spread of 2.8% over USD Libor which is somewhere close to where their 5 year SGD paper is trading, the SGD paper being undervalued given the illiquidity in the SGD bond market.

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