Global Daily – De Guindos set to be ECB VP

by: Aline Schuiling , Nick Kounis , Bill Diviney

ECB View: Eurogroup to recommend Luis de Guindos for ECB vice presidency – Following the withdrawal of Ireland’s Philip Lane from the candidacy, the Eurogroup is today set to recommend Spain’s Luis de Guindos to be the next Vice President of the ECB. The next step will be for the European Council to agree and subsequently consult the European Parliament, as well as the ECB’s Governing Council. Finally, the Governing Council can appoint Mr de Guindos. We think that Mr de Guindos has dovish views on monetary policy. Ironically, Mr de Guindos’s main competitor for the post of vice president, Ireland’s Philip Lane may be set for bigger things. The Bundesbank President Jens Weidmann appears to be the current frontrunner for the Presidency of the ECB (Mario Draghi’s term ends on 31 October 2019). Our sense is that he is too hawkish to ultimately get the support of a broad range member states. This could open up the door for a more centrist candidate from a Northern European member state and Mr Lane does fit the bill in this case. Instead, a more hawkish Northern European (such as Ardo Hansson – the Governor of the Estonian central bank and also a candidate for the Presidency) could take the Chief Economist role (Peter Praet’s term ends on 31 May 2019). Such a scenario would see three doves at the top of the ECB being replaced by a dove, a hawk and a centrist by the end of next year. So the ECB would likely become less dovish. (Aline Schuiling & Nick Kounis)

US Macro: Subprime auto loan defaults not a great cause for concern – Q4 household debt statistics were released last week, and showed total household debt increased for a fifth consecutive year to USD13.1trn. While this was a 4.5% increase over the level at the end of 2016, with nominal GDP growth not far off at 4.1% last year, household debt as a percentage of GDP was essentially flat at 67.8% (well below the 85% of GDP that prevailed before the crisis). Auto loan delinquencies in the subprime sector have made headlines in recent quarters, rising from a post-crisis trough of around 6% in 2012 to close to 10% in 2017. This is likely a reflection of the looser lending standards for autos, where so-called ‘liar loans’ (where borrowers’ incomes are not verified) are still legal, in contrast to the mortgage market. However, auto loans make up just 9% of total household debt, compared with 68% for mortgages, and total household debt delinquencies have continued to trend downward, falling to just 3.1% as of Q4 17. Moreover, while subprime lending in the auto sector is much higher than that for mortgages, at around 20% vs 4%, this is well below pre-crisis levels of 30%, and we note that lending standards have been tightening of late, as shown by the rise in the median credit risk score for new loan originations. All told, while investors should be cognizant of emerging risks in household debt following the financial crisis, they should also draw comfort from the much lower levels of total leverage and stricter lending standards in the far more systemic mortgage sector. (Bill Diviney)