Will the ECB be able to maintain its financial orthodoxy for a long time to come? That is a legitimate question. Central banks seem to want to go ever further in creativity to support wobbly economies. The technique is simple: it is called "asset buyback (asset purchase)." But what assets will you tell me? That's where creativity comes in. There is no longer boundaries. Jerome Powell, the boss of the Fed, as well as Christine Lagarde, the president of the ECB, through their institutions are launching billions plans every day. For example, the Fed will buy back corporate bonds deemed risky and securities that have recently been rated "BBB-" but have fallen into the "rotten bond" category (i.e. "junk bond"). To argue that good companies were nonsense because those in need of help are in principle the weakest, right? Jerome Powell is Mr. "We are doing all we can" and Christine Lagarde Madame "whatever it takes" (which she took over from “Super Mario” Draghi). The ECB, for example, buys commercial paper issued by companies, to also sustain MMF’s. Monetary taboos and sacrosanct economic principles are flying apart. The danger comes from the States which will be over-indebted for the next ten years. Financial orthodoxy is not just exploding at the ECB, but at every national level too.
The next step will probably be the repurchase of shares (i.e. listed equities), as does the Bank of Japan or the Swiss bank to diversify their reserves. The FED and BCE never crossed the Rubicon. She won't be able to turn back the clock. Studies would tend to show that share purchases via ETF's have a positive effect on the economy and of course the price of shares. Oli Rehn, former European Commissioner during former GFC and president of the Bank of Finland, supports this idea. They would contribute to the wealth of individuals and families holding shares and thus support the economy through consumption. That would be the so-called "wealth effect." Be careful, however, not to exaggerate because the excess harms everything. To return to Japan, the Japanese central bank is the largest holder of shares in its country. It is not very healthy and sustainable in the long run. Speculative bubbles should not be created, as with bond purchase. So, let us accept that the next step is written, and that Christine Lagarde will sooner or later cross the Rubicon. So soon the dice will be thrown away. Survival is priceless.
François Masquelier, CEO, SimplyTREASURY
The ECB is crossing the Rubicon - "Alea jacta est"
« The song remains the same » (Led Zepplin)
The current situation of US mortgage groups which are at risk of bailout (once again) reminds me this song from Led Zep. Fannie Mae & Freddie Mac face struggle if lockdown is extended… and it will be.
“Fannie & Freddie”, could be the title of a Summer love song… However, it is not a nice song. It looks like a drama. These two companies guarantee nearly half of US total mortgages. It looks like a new huge bailout could be required. If they start to go more than two months, then there will be real stress on this market. People talked about a situation like during the great recession. In the US with increasing unemployment, lots of people won’t be soon able to repay their mortgage. It looks like 300k borrowers already asked for forbearance on loans backed by Freddie or Fannie. We read that Freddie & Fannie are still placed in a” conservatorship” since the last GFC and levered at 240 to 1. I am afraid the Congress will have to rescue these two agencies soon in case the containment lasts more than initially expected. It is always the same chorus… coming back again and again. It illustrates the fragility of financial systems, including those of what is supposed to be the first financial power of this world.
François Masquelier, CEO, SimplyTREASURY
What will be the shape of the recovery in the markets when it comes?
An interesting question is what shape the market recovery curve will take when it recovers (because there will be recovery sooner or later). We talk in form economics in “V”, “U”, “W”, “L” or even now in “I”. Knowing what form the recovery will take is a complex question for any economist. The Chinese economy will give us the "LA" and we will see what happens at home, as a sign of what we might see in Europe. It's all about time. Between the ideal, the "V" shape, the most likely, the "U" shape, the most classic the "L" or "hockey stick" form, the most pessimistic, the "I" shape or the double bounce the "W" shape, it is difficult to make your choice. Hopefully we won't have a phase of stagnation (L-shape) but rather the shape of the "NIKE" logo in a slow-moving hockey stick. The "W" shape will depend on whether the virus is controlled. If it came back in the fall, the "W" would prevail. Stock markets may not be going to follow the economy at the same time. The worst would be the hypothesis to the Roubini, famous omen, who likes to see life in black, his favorite color apparently. I see it rather clear and colorful ... I think that a recovery will take place, but that life will have changed in the meantime and that the speed of recovery will be affected. Nothing will ever be the way it was. We're going to put some things in perspective at the expense of consumption. We will go back to certain basic values, to the detriment of the total capitalist economy. We're going to challenge some of the business models and rethink the way we behave. It is a financial crisis that follows a health crisis, but it could have a beneficial impact on the whole world. Comparing the COVID-19 crisis to 1929 seems silly, the context is different. Comparing to 2008 makes sense but again the impact will be much more violent and profound. With stimulus and coordinated actions, the States will try to boost the economy to the EPO. A violent sting, a horse serum, an armada of targeted actions, numerous plans and share buybacks to support finance. Ask for the program! Here it is, a lot of concrete measures that we hope will work. The bounce that will come in its form, speed and amplitude cannot really be drawn. Let's hope it powerful, as fast as possible and return to basics forgetting the effects of panic, fear, over-prudence and lack of ambition. Before the COVID-19 the situation without being shimmering was finally not so bad. We come to regret it and hope to return to "before". Wasn't it better "before" people used to say? It's a must-see. I think the best is still ahead.
François Masquelier, CEO, SimplyTREASURY
How to increase your credit line in a few weeks. . .
Nothing magical, all you need is a bit of logic!
The tool has been on the market for a long time, but is not always convincing. Indeed, factoring or factoring sometimes seems too expensive, or even too restrictive administratively, or unattractive in terms of image, as it is still often perceived as a kind of spare wheel for financing. On closer inspection, however, it is more interesting than it seems:
-
First of all, in terms of financing costs, by adding factoring and interest charges, it is not necessarily more expensive than a normal line of credit and moreover it should not be since it does not require setting aside reserve capital for the factor.
-
Therefore, there is no need to worry about using the lines of credit to avoid being subject to penalties for not using them (“commitment fees").
-
Finally, with a little organization and good IT tools, setting up the process of assigning receivables and monitoring financing is not that complicated.
-
Moreover, nothing prevents you from negotiating better prices by paying your suppliers earlier or even entrusting credit risk management to the factor.
Basically, the most laborious was to reassure the legal aspects of the few customers who had inserted a clause of non-transfer of payment rights in their purchase contract and to communicate to everyone the change of bank account.
For SMEs that find it difficult to pay their suppliers on time due to a lack of liquidity, this is in any case a solution that should not be overlooked.
K. Zago