Interests 24 hours to save the National Health service. German utilities have trade 4 higher after the countrys Constitutional Court declares a Nuclear Fuel Tax illegal. Good morning, everyone. Its wednesday. Glad youre with us once again. Lets take you straight to the European Equity markets this morning. The ftse is up 0. 21. The cac 40 is up by 1 3 of 1 . Lets take you to the sectors. What youre seeing is banks are doing quite well. Despite spain, banks up 1. 3 . Chemicals down by. 3 . Santander is taking over Banco Popular. Theyre buying it for the symbolic price of 1 euro. Santander says the popular brand will completely disappear in the deal. Pimlico is also wrapped up in this deal. Theyre the largest holder of the banks riskiest debt with 279 million euros. Karen has been breaking the story all morning long. To me, karen, it seems like this is a Banco Popular specific story. It didnt send shock waves through the industry, right . It is a specific story but it talks about bank rescues here. It is a private twist, a private sector bailout. Very interesting when you talk about the direction for rescues here in europe. The other big point here, you mentioned symbolic amount, 1 euro was the buyout price. Santander has to reach into its pocket to provide provisions for popular. There is a cost percent. You might ask, you know, what is in it for santander. The argument is from 2019 onward it starts to generate profit. It bolsters the share of the domestic market percent by about 25 . Santander is a business thats been diversifying aggressively. You have the bulking up when the eurozone is meant to be improving. What does it mean for the rest of the banks, you saw very negative trade around santander for its now being dragged into the situation. Very strong reversal. I think the message from the spanish economy is quite key saying it implies no contagion to other banks. It implies there might not be any other bailings from other depositors. The question that i would have now is about the 7. 9 billion euros that have been set aside from santander to meet the mpls. We know they have a history of winding up nonperforming assets in spain after financial crisis. The strategy was trying to hold on to some of those asset, stabilize the market to have a a better environment to sell those assets back into and hope some of those mortgages that had gone south would improve. That might be a strategy from 2017 to 2018. Karen, you raise some really good points. Lets put those questions to peter. Peter, always a pleasure speaking to you. How did Banco Popular get into this position, this predicament in the first place . Are these still the eurozone crisis problems . It does seem like popular is in this particular case the bad loans that it wrapped up. I have to say really learning this morning the extent of that problem. The fact that santander is setting aside that money on populars Balance Sheet suggests there was quite a lot of bad debt there, probably more than people from the outside had thought was the case. Thats why, 37 billion euros in nonperforming assets is what was said. A fraction of that set aside. How do you rank santander to shed those assets after an improving housing and Property Market in spain with a better economy . Santander is the biggest bank in spain. With this provision it will have increased the coverage on those nonperforming loans quite substantially obviously raising a load of equity to basically absorb popular. It will be in a position to kind of ride out the bad loan cycle. But i think, i mean, the interesting sort of broader banking situation here really because this is really the first substantial bank thats been sort of more or less resolved under the new European Bank resolution rule. So even though santander is buying popular for 1 euro, equity holders and holders of subordinated, you know, kind of additional tier 1 capital bonds and tier 2 debt are basically getting nothing in this transaction. So there is also some burden sharing, some risk sharing with private investors as part of this whole rescue. Another burden sharing vote and deposit holders and other bank windups youve seen deposit holders on the hook. Can we read anything into this if deposit holders do not have to contribute a cent . Were still trying to sort through the details but it does seem like santander was willing to take on most liabilities. The people got wiped out and that was to say, you know, that was not the kind of the Central Market assumption even though people realized that popular was in trouble, there was some expectation that those additional tier 1 bonds might be converted into equity. People were going to get nothing back. You have to read across that to perhaps some other weak banks in europe and say, okay, if europe is as it seems the european regulators are quite willing to put these use the resolution powers that they have and to actually kind of make sure that people down the capital structure, you know, take the risk, then that presumably will be reflected in the pricing of the lowest sort of lower instruments, the equity and the lower bonds for other Spanish Banks but also in places like italy. Looking at some of the pricing of the 81 bonds, just recently some of them were held by pimco obviously. We saw them trading at 68, 65 cents on the euro. Didnt completely price in a default as such. Just a more general question pertaining to the link between the Banking Sector and the state and the government itself, weve always seen that very close link during the eurozone debt crisis and officials were very keen to sever that link to make the Banking Sector and to make the sovereign a lot more immune to some of the banking crises. We saw that spanish yields didnt react very much in the last couple trading days when the concerns around Banco Popular became very apparent. Do you feel, are you confident that this link has now been broken . I dont think we can say that for certain, but its certainly a step in the right direction. I mean, you know, what you have here is a situation where basically the european mechanism has allowed populars Balance Sheet to be adjusted to a point where the Bank Santander is willing to take over its assets and liabilities. If you hadnt done that then you would have had to involve public money a bit like we saw in 2008. The fact that we can basically these banks can now sort of be resolved and sold on without the involvement of public monies is significant, but on the other hand, you still have to have a bigger bank thats willing to absorb the assets and the liabilities of a smaller one and that game, as we know, as weve seen elsewhere cannot necessarily always go on forever. So i think its a step in the right direction but i dont think we can definitively say that the link and the bank bail jourt psy bailout cycle has been broken. In italy the Italian Government is putting pressure on European Commission and european regulators to give it greater leeway to maybe help out credits of smaller italian banks. So its a step in the right direction but the link is definitely not broken. I want to raise the point of what this means for investors who have been chasing yield that have gone further down the credit curve, particularly into banks, because they thought the ecb, that mario draghi was ready to help out a number of these names. Do you think it alters the risk profile and whiteyness of investors to hold the bond portfolio in some of the riskier banks across europe . Yes, probably. It depends where in the capital structure you are. I mean, you know, its always ever since the crisis sort of the argument has been that, you know, kind of shareholders and junior bond holders should take the losses when theyre losses and they shouldnt be bailed out but with public money. Thats effectively what is happening here. If youre a senior Credit Suisse popular, youre going to take a risk but youre going to be okay. There ease different risks in the capital structure which is the way the market should work. But, i mean, its always interesting in these things when they happen for the first time to see what the knock on consequences are for other banks who might be in a similar position. Peter, thank you so much for your time. Really appreciate it. Karen, as always, thank you to you. The british people will vote tomorrow to choose a new government in whats seen as a head to head showdown between theresa mays conservatism and jeremy corbins party. Its seen her come under pressure for dodging debates and backtracking on her partys did he men is a party. She has focused on brexit saying no deal was better than a bad deal. More recently shes had to defend her record on police cuts in the wake of the terrorist attack on London Bridge. On the other side we have Jeremy Corbyn. He has surprised pundants focusing on issues Like Health Care and education. The left winger plans a Major Overhaul including hiking the Corporation Tax of 26 . Hes eager to nationalize some british industries. Hes facing questions with some critics saying he would be too soft on the fence. Theresa may has seen her poll leads slashed to 22 points to single digits. Corbyn is only two points behind in some polls. Lets get out to westminster. We have some news on the shadow home secretary diane abbott. Reporter thats right. We understand from a number of british Media Outlets that diane will be stepping back from her role as shadow home secretary. That is the senior official in the u. K. When it comes to security. Shes been over the last few weeks pummelled by conservative parties, leaders like theresa may, for her awareness when it comes to brexit. We understand shes going to be stepping back from her front line role due to health. She canceled a radio interview later in the day on the grounds of ill health. Shes apparently stepped back from that position. Shes being replaced by lynn brown whos the shadow minister of taking over for diane abbott over the rest of the campaign, one presumes. Weve also got some other stories that we should be focusing on over the course of today around security. That is a major issue following the attacks of course saturday night over London Bridge. Theresa may has faced a lot of criticism about her policies, her decisions when she, herself, was home secretary for six years prior to becoming prime minister. Shes struck back saying shes going to take a much stronger, morrow best line on counter terrorism. Lets take a listen to what she said. I mean longer prison sentences. I mean making it easier for the authorities to deport foreign terror suspects back to their own country. And i mean doing more to restrict the freedom and movements of terrorist suspects when we have enough evidence to know they are a threat but not enough evidence to prosecute them in full in court. And if if our human rights laws stop us from doing it, well change the laws so we can do it. Reporter now Jeremy Corbyn has said its not about Police Powers and Security Agency powers, its much more about resources, that means money. Hes criticized theresa may for cutting more than 20,000 jobs as secretary. Shes been accused of posturing by the head of the liberal democrats tim farryn. Jeremy corbyn out on the campaign tram much more focused on what he calls damaging funding cuts from the conservatives. Lets take a listen to what he says. This is fundamentally a choice. Another five years of a conservative government no. I take thats a no to another five years of a conservative government. Thank you very much. What it will do is continue the under funding of our nhs, continue the crisis in our schools, continue the crisis in our housing and continue the unfair treatment of the majority of the population whilst at the same time handing more tax give aways to those at the top end. Reporter when theresa may called the snap election nearly eight weeks ago now she was focusing on brexit. She wanted a stronger mandate when it came to brexit negotiations. The mandate has shifted because of security and although she has lost a lot of her lead in the polls, the conservatives still above labor by a number of points depending on the poll you look at. As voters prepare for tomorrow morning, it looks like the conservatives will hold their majority. Of course, that will very much depend on Younger Voters and how they turn out to vote. Less than 24 hours to go until voting kicks off. Want to talk more about whats on voters minds as we head into the crucial election. Thank you so much for joining us this morning. We know that security in the last couple of days after this horrible london attack, London Bridge attack has really come to the forefront when it comes to voters minds. Does the economy top the agenda at all . Surprisingly, i dont think it does. Its been an Unusual Campaign in that request. Personally ive been surprised the conservatives didnt make a little bit more of the very strong Employment Situation that we have, the situation in the country is actually the Economic Situation is actually pretty strong. Apparently thats not whats on voters minds and, therefore, its not whats on the candidates lines. As you pointed out, u. K. Unemployment is the lowest since 1975 at 4. 6 . Yet on the other hand maybe the conservatives were quite smart not to focus too much on that. At the same time we are seeing real wages are being squeezed as inflation is moving higher and wages are very much range bound. That is surely a concern going forward. I think it is, but on the other hand jobs usually are the key element in political campaigns. There the conservatives have to send a strong record. I think the squeeze on wages, well see. Wages are usually a lagging indicator. First you get tightness in the labor market and then you get wage increases, and here its going to be a race between the wage increases and inflation. But this is certainly something that the boe has been concerned about. Theyve taken a wait and see approach after the massive stimulus after the brexit vote. Does it seem like their hands are tied until after the brexit negotiations are finalized . Could we see the boe stay put for the next two years . I certainly hope not. Its possible. Ive been quite surprised that Kristin Forbes has been the only mpc member who has voted for a small increase in Interest Rates. I think if one steps back from the rhetoric and looks the a the situation where inflation has been 2. 7 , weve had a massive stimulus from the fall in sterling, the labor market is tight as weve just been saying. Last year growth was probably above our sustainable rate, 2. 2 , its hard to see why one should not remove some of this monetary stimulus and begin to raise Interest Rates. The argument from the boe is theres so much uncertainty whether well have a transition deal, what the actual transition deal looks like and what the brexit negotiations will take shape because at this point weve got a very hostile e. U. On the other side of the bargaining table. Do you understand some of the reasoning behind the boe . Well, i think theyre making a case, but actually if youre really worried about the uncertainty of brexit, i would think the thing to do is build up a little ammunition now. Take advantage of the situation, which is a robust economy, begin raising Interest Rates, at least remove the extra stimulus that was put in after the referendum on the theory or on the hypothesis that the economy was going into a downward spiral which, of course, didnt happen. So what you really need to do is get Interest Rates to a level where you could, indeed, drop them if the situation on brexit turns out worse than expected. There have been some rumors that after this election tomorrow well see a cabinet shuffle. Of course, the conservatives say power and Phillip Hammond said that he might be losing. Do you think that would be a good idea . Depends on who would take his place. Yeah. I think i think hes done a reasonable job. Hes a very cautious person, but he does seem to have an understanding of business interests and so hes one of the vehicles through which business can actually get to the government in power. So i think it would be risky to drop him at this point. We will have to wait and see who would actually replace him. Thank you. I appreciate your input. And still coming up on the show, well be live from the conference in hong kong. Well be back in two. Hey, the future, whats her problem . Apparently, i kept her up all night. 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