By Claus Vistesen, on September 7th, 2011
 One of the stories that caught my attention this week was the Bloomberg piece about how banks in London and New York are starting to jump ship on the old finance hubs due to fear of effects from planned regulatory tightening.
Quote Bloomberg
Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.Nomura Holdings Inc., HSBC Holdings Plc (HSBA) and UBS AG (UBSN) are among lenders preparing plans to book as much business as possible through legal entities in jurisdictions where tax rates are lower and rules on capital and liquidity are less onerous, the banks and lawyers and accountants working with them say.
(…)
Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.
Perhaps this is a sign of the times in the sense that both banks and market participants seem to be looking increasingly outside the boundaries of the developed world for growth, profit and eventually prosperity. Having just moved to the Big Smoke I would not necessarily lament a downsizing of the finance sector even if it is the pond that I also do my fishing for the daily meal ticket. Perhaps, if fast moving financiers chose to go to Singapore instead of London, the residents of the latter would not have to endure paying 300.000 GBP for a studio flat in Canary Wharf [1].
Of course, it may all be a red herring but it could also be part of a number of tentative signs that the locus of global activity on a variety of fronts is moving to new epicentres. Let us hope they do not travel entirely in our foot steps.
More generally, we just put out our monthly report and the outlook is very much wishy-washy. Surely, our leading indicators are pointing down, but after the market puke in August it seems to me that the end of the world had almost been priced in as the S&P500 hit the 1100 marker. In this sense, do not be surprised to see it ticking towards 1250 even if the recent job data were abysmal, but beware. The old range has been broken and we are finding a new lower one. Market prices have a tendency to become “normal” after a period and with global economic activity visibly slowing the fundamentals are not really on the bulls’ side even if they point to the merits of chasing a counter trend rally after a 10% drawdown.
More generally as I noted before, the divergence between respectable analysts is widening which always makes me take a few steps back. On the one hand I see both buy side and sell side analysts rather stubbornly sticking to their year-end S&P500 targets of 1300-1400 while other independent analysts put the fair value of the index at 900-1000. Both will obviously have an axe (or maybe even a book) to grind, but part of my job is to synthesize the consensus into a fairly straight road map for our clients, and it is getting difficult.
I tend to side with the pessimists if only because I find it difficult to see how US corporates can continue to operate as efficiently as they have been doing so far. Gerald Minack had some excellent points on this in his latest report;
A big medium-term uncertainty for DM equity investors is the sustainability of earnings. A decade ago, the big uncertainty was whether valuations could be sustained. They weren’t . The de-rating may have further to go, but clearly valuation is less of a headwind now than at the TMT-inspired peak. Earnings, on the other hand, are very high. Profits are now near an all-time high as a share of global GDP, and the real return on equity has followed . What’s not able, however, is not the cycle rebound, but the elevated level of earnings (and real returns) over the past decade. The forward-looking issue is whether those elevated returns can be sustained. At a global level, the answer may be ‘yes’ – for the simple reason it’s now possible to make profits in places where previously it was not. What’s not clear is the sustainability of high earnings in the developed world.
In particular, I would would point to the contradiction between continuing ultra low unit labour costs and the need to now see growth moving from cost cutting to topline growth. Something does not add up.
Real unit labour costs are now at 60-year lows. This matches the decline in wage share of GDP to a 50-year low. Arithmetically, this is the most important support for high profits. As I’ve discussed in prior reports, it’s not clear how long households can support consumer spending at near 70% of GDP with labour income at multi-decade lows. That’s been possible recently due to massive transfers from the public sector, but that support appears unsustainable.
In my opinion, this is big elephant in the room in relation to the US stock market. It will be difficult for earnings (and margins) to stay at current levels going forward. It follows naturally from the fact that if all companies cut costs and this improves margins this will only work for a limited period time as there are decreasing returns if everyone follows this strategy at the same time. Now we need to see topline sales growth for margins to be sustained, but this is obviously difficult with the current macroeconomic backdrop, so something has to give.
Globally, coincident data is already slowing visibly across the globe with headline PMI readings and trade data coming in steadily lower. In that sense we are up against the wall again only so shortly after the shock of 2008/09 and this time, the ability of policy makers to respond is limited.
However, I would be weary about calling this another 2008. One of the effects of experiencing a balance sheet recession with subsequent deleveraging is that trend growth falls and thus that the economy becomes liable to more frequent recessions. This applies to the US in particular but essentially also to the whole of OECD. This means that we will see more frequent but also essentially shallower recessions. The only qualifier here is really that some parts of Europe are now stuck in a depression locked in a vice of dysfunctional institutions and a lack of willingness and political capability to deal with the problems.
As such, within Europe also lies the potential source a Lehman like shock should the crisis prompt a rapid and violent default of one or more sovereigns and/or financial institutions. Certainly, euro area banks are feeling the pinch as USD funding is getting cut off and if anything it seems to me that the EURUSD is looking a bit too strong for its own good given the backdrop of the mess in the euro zone. As cash levels at euro zone banks are drawn down the currency will adjust to fundamentals not to mention of course the fact that the ECB is slowly but steadily being pushed into full blown QE and monetisation of peripheral debt.
The latest G&F provides a good summary;
(…) The risk of a dollar rally against the euro in coming months is growing. This is because, sooner or later, the ECB will have to reverse its recent insane monetary tightening. Trichet made a start in this direction this week in his usual ponderous manner. Thus, he told the Committee on Economic and Monetary Affairs of the European Parliament in Brussels on Monday that “risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September.” The issue here is whether markets will allow Trichet to save face and not performs an abrupt U-turn before his scheduled departure from the scene on 31 October.
More generally, the recent comments from the IMF that euro zone banks need additional capital is once more a case of stating the almost obviously obvious. The transmission mechanism here is very simple. The market is now effectively pricing in a default of Greece and possibly other peripheral economies and this means that the attention must now turn to the losses that creditors will bear or, alternatively, the size of the bailout if we stick to the old mantra of no losses. As a good friend of mine pointed out recently,
All trough last month’s banking shares’ collapse, I have been thinking that perhaps, equity investors are worried that the recapitalization will be different this time, with either the taxpayer (wrong solution) or the bondholder (rightly, through a bond-for-equity swap), massively diluting the shareholder. Politicians obviously do not have the stomach, nor the muscle for new bailouts.
Or to put it differently, there are no easy solutions left. One solution is the Brady Bond plan which is currently being floated in the case of Greece. The problem as I see is that it is fudged precisely when it comes to the current valuation of the bonds. Basically, there has to be pain today for the creditors, otherwise we are just kicking the proverbial can down the road as recapitalisation is avoided today but made worse for tomorrow. A solution for recapitalising banks today would naturally be for their creditors to accept a swap for equity and thus being moved into the frontline to absorb any losses that the banks would bear on sovereign debt, but that is not popular. Essentially, being degraded to equity holder in a bank with known sovereign assets in the European periphery is equal to taking a haircut on your initial investment, but all this then leaves the inevitable question of who and when someone will step up to take the lead in the debt restructuring.
Of course, the idea of substituting debt for equity is the same principle applied in the case of Greece posting domestic assets (islands, utility companies etc) as collateral for credit. We can then think about this collateral as Greek sovereign equity and as with creditors of banks, it is all good in theory but in practice, not so well.
Elsewhere, the game of Old Maid in global currency markets continue with the SNB still in the spotlight despite already having taken desperate measures to stop the appreciation of the CHF;
Quote Bloomberg
While the Swiss National Bank has so far avoided currency purchases in its latest bid to keep a lid on the franc, it may soon have no alternative but to follow through on its threat to intervene, economists and strategists said.
But what really caught my attention was comments by Brazilian Finance Minister Guido Mantega that lowering interest rates represents an effective antidote against an appreciating currency.
Quote Bloomberg
For “the next two or three years, the conditions will be there for rates to keep falling,” Mantega told reporters in Sao Paulo today. “Falling rates are a good antidote for the gains in the real.”
Allow me to quote myself from the post linked above;
Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end of the game. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.
The easy investment advice here is naturally to buy the Old Maid which means that just as the global financial punditry searching for clues as to what lies ahead for the global economy and the looming slowdown the SNB et al may have to skint yet awhile for light at the end of the tunnel.
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[1] – No my dear reader, I am renting and I would never touch these things but they are there and they are being sold.
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By B.P.T., on August 26th, 2011
With economic uncertainty continuing to hamper economic growth, inflation has been non-existent, and mortgage rates have remained low. Current rates for conforming loans have dropped below the lows seen late last year to set new record lows for fixed rate mortgages, 5 year ARMs, and 1 year ARMs.
However, many new home buyers looking for a new mortgage and existing home buyers that would like to refinance their current mortgage have struggled to take advantage of these record low rates because of stricter lending standards put in place by most banks or a lack of equity in the home.
Fortunately for people looking for a mortgage that have been unable to obtain one, there have been rumors of another attempt by the federal government to assist existing homeowners swirling around Washington, and most of the plans under discussion are more focused on benefits for existing homeowners that are expected to end the decline in home prices, rather than improving bank balance sheets or handing out credits to new home buyers. These programs are expected to help existing home owners immediately and new home owners in the long term by increasing home values, making a home a safer investment and a quality asset again.
One assistance program that has already been put into place is a refinancing program for existing home owners with little to no equity in their home. The program is for mortgages owned by Fannie Mae that were originated before June 1, 2009 without any mortgage insurance, and it will allow qualified applicants to refinance their mortgage debt (including a second mortgage) up to 105% of your current home value at current market interest rates. These stipulations do limit the pool of eligible home owners, but for people that qualify, it is a great opportunity. You can begin by determining if your home loan is owned by Fannie Mae here.
If you believe that you qualify for the Fannie Mae program described above or are looking for any other type of mortgage assistance, you should contact a lender like Aurora Loans to start the process of obtaining a new mortgage or refinancing an existing one.
By Simon Grey, on July 11th, 2011
In a June 21 response, attorneys for the church indicated the church had strategically defaulted on the mortgage after learning its real estate – a 23,635-square-foot office building housing the church – is worth only $2.375 million vs. the $7.653 million owed to the bank.
This strategic default involved an analysis of whether it made sense to use church members’ donations to pay the underwater mortgage while also trying to save money for expansion needs.
I remember arguing with a preacher once over the morality of strategically defaulting on one’s mortgage. He was of the opinion that, per Romans 13:8, we each have an obligation to pay off our debt. His argument struck as somewhat asinine (but less asinine than the argument that Romans 13:8 forbids the Christian from going into debt).
Anyway, the flaw in this preacher’s thinking was that defaulting did not lead to repayment of the debt. Most mortgage agreements work like this: the borrower agrees to borrow a certain amount of money and repay it, plus a usury charge called interest. The borrower is generally expected to offer some property as collateral. If the borrower fails to pay per the terms of the agreement, then he is in default, and the lender usually reserves the right to confiscate the collateral in order to cover the remainder of the principal. For most mortgages, confiscation of property is generally considered sufficient compensation in the event of a default (which is predicated on the theory that housing prices always go up and never come down).
Thus, the lender is essentially saying that the property offered as collateral is equivalent to the value of the foregone cash. Whether this assumption proves to be true in the long run is not the concern of the church, in this case, but of the bank that makes the loan. And if the bank’s estimation of the future value of property is wrong, it does not follow to claim that the church must repay the bank for a mistake the bank made. Furthermore, the bank has already said that ownership of the property in the event of a default essentially marks the debt as paid, so there is nothing wrong with the church defaulting on its payments in order to save money (in fact, the church would do well to default and then repurchase the property once the bank sells it).
Therefore, it is not wrong for the church to default on its loan, for it is simply making a prudent financial decision and will, even by defaulting, pay its debt. The bank, not the church, is responsible for determining market risk, and the bank, not the church, should bear the consequences of making the wrong decision.
By Claus Vistesen, on June 24th, 2011
Not too long ago, I compared the Japanese economy to a bumblebee because of the economy’s ability to keep on chucking along even as the government debt/GDP ratio stormed above the 200% mark. I am starting to think that the same comparison might be warranted too in the case of my home country.
One striking aspect of the Danish economy that any economist following the discourse on Denmark must be pondering is that despite the widespread idea that Denmark has a serious productivity problem relative to its peers, it has not yet shown up in the data. Denmark is still running a sizeable trade as well as income surplus which together adds up to a tasty current account surplus.
So what gives and can this situation be maintained?
The reason that I have been forced to think about this was today’s report by Bloomie that the Danish bank and mortgate originator Nykredit announced that it would actively seek to widen its international investor base for covered bonds backed by mortgages of which the bank is Europe’s largest holder and which contributes to making the Danish market for mortgages one of the world’s biggest.
Basically, the problem for Danish financial institutions is that under the new Basel rules, covered bonds backed by mortgages will be treated as less liquid than government bonds (and thus less liquid than is currently the case) and thus Nykredit et al will be left holding way too many of these securities. The problem in a nutshell is this;
Denmark is leading efforts to persuade the European Union to ease liquidity rules set by the Basel Committee on Banking Supervision that the Nordic country says penalize the world’s third-largest mortgage-bond market. While the EU has signaled it may accommodate some of the demands, standards scheduled to take effect by 2015 are still likely to treat covered bonds as less liquid assets than government debt, Engberg Jensen said.
“I don’t think we can totally avoid a haircut” on how banks treat covered bonds in their liquid assets, he said. “I don’t think that we’ll end up with rules where covered bonds and government bonds are equal.” This means “we need to find a broader investor base. We want to be stronger in Europe and we have also started in the Middle East and the Far East. We’ve had investors for many years in the U.S. and Europe.”
Under the new rules, banks must abide to a limit of 40% in terms of how much of the securities portfolio that can be made up by (mortgage) covered bonds which leads to the obvious result that …
“If we get the new rules, most Danish banks will have to restructure to sell mortgage bonds and buy government bonds,” Engberg Jensen said. While Danish banks have relied on the country’s covered bonds to generate liquid assets, lenders in Germany and Asia have room to purchase the securities without breaching Basel’s 40 percent limit, Nykredit estimates. The company wants to sell its bonds to banks in those regions to make up for the selloff it expects to see in Denmark, Nykredit Group Managing Director Karsten Knudsen said in the same interview.
Denmark has a problem here, a big one in my opinion and the only chart you need to look at is the following.
(click on picture for better viewing)
Despite the crisis, Denmark has not delevered substantially and mortgage debt remains a sizeable portion of GDP; 134% by my calculations in 2010. And this is mortgage debt alone and thus leaves out a large private debt burden, all corporate debt as well as a growing government debt.
It is important to understand where Denmark is here. Denmark is like Spain, Ireland and Australia with large a large private debt burden which will only really make itself felt once the government has to assume the final bill (think Ireland here). Now, at this point my compatriots would know doubt file this post under the “one flew over the (…)’s nest” folder as comparing Denmark with the countries made above seem more than outrageous. But try to get the main point here. Denmark’s main debt problem is in the private sector and given the Irish experience, once the sovereign has to plug a hole in the domestic financial system, it is the total debt that matters and not merely the government debt.
Recently, the EU commission issued a report with a stark warning to Danish policy makers that both the size and structure of the housing market with the majority of loans made up by variable interest rate and no-amortisation/down payment (often both in the same loan!) represented a current and future source of instability. The Danish central bank has even suggested to phase out these loans entirely even if it seems that such a proposal has not got political backing in the Danish parliament regardless of the result of this year’s election.
According to Bloomberg, Nykredit and others have noted that they will try to separate the way they funds their adjustable rate mortgage portfolio from their fixed rate portfolio. This is almost hilarious in its uselessness in my opinion since the main problem here is not a flow issue but a stock issue as evidenced by the chart above.
When all is said, I think you should take away the following point from this.
Essentially, if Danish mortgage originators start selling bonds to foreign investors for the obvious rational reason that they need to abide to new capital requirement rules it will mean a defacto deterioration of the current account (not necessarily a problem, just a fact when you sell securities abroad). So, the question is; how willing will foreigners be to finance one of the most overlevered housing markets in the world and at what yields?
When I run the scenario in my head, I end up in a situation where it might be quite difficult to push Danish covered bonds to foreigners at acceptable prices, liquidity will dry up and re-financing will get more difficult. In addition, if yields go up prices (i.e. house prices) will fall and exacerbate the difficulty in pushing the securities since the prices on the underlying collateral (i.e. property will go down).
Now, far be it from me to attempt to put Denmark in a club to which it does not belong but think about it for a minute. The road map for how a Danish government might be forced to issue government bonds and swap them for unsellable covered bonds in order to allow its financial institutions to abide to the Basel rules is an almost sinister way in which the Danish sovereign ultimately may end up being on the hook for the total stock of debt in the society, just as we have seen elsewhere.
Am I seeing ghosts? Perhaps, but consider yourself warned.
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By Simon Grey, on June 9th, 2011
Kenneth Wright of Stockton, California was almost knocked down by a S.W.A.T. team breaking down his door one morning. He says they then handcuffed him and put him in the back of a police car.
Federal agents confirmed that the Department of Education was behind the raid on Wright’s house. They were in search of his estranged wife, who had defaulted on her loans.
The rich rules over the poor, and the borrower is the slave of the lender.
Quite simply, if you owe Uncle Sam money (seeing as how Uncle Sam guarantees the loans, this would essentially be the case) then this sort of thing can happen to you. As a slave, you have no rights. Your owner can do whatever he wants, and there is no recourse for you as a slave. Think carefully before you sign the dotted line.
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By Bron Suchecki, on May 4th, 2011
“All investments are made with surplus value (some of which has been borrowed to be invested), which has been netted out of the flow of value by those who produce more than they consume. This stock of value is commonly known as wealth. But governments and borrowers are consuming more than they produce, and as such are consuming from this wealth accrued by others.”
Part of the problem is that those who produce more than they consume stupidly lend to those who consume more than they produce. If the lenders only lent to those legitimately aiming to increase value by starting/expanding businesses (real wealth creation) would we be in the problem we are?
However, few can directly lend to productive members of society. That is the function performed by bankers as they are supposed to intermediate between lender and borrower, doing the checks on the borrower the lender does not have the skills or time to do.
However, the banks haven’t been productively lending as proven by Money Morning who show, as an example, an Australian bank (ANZ) is currently lending 59% into the residential mortgage market compared to 25% in 1978, when they were lending a far bigger proportion to wealth creating business. As Money Morning says: “In 1978, total lending to the business sector made up over half of all the bank’s lending. Yet today it’s a pathetic 17%. … The result is less credit flows through to business, including entrepreneurial business. It means just as private enterprise can be crowded out by government spending, private enterprise can be crowded out by a misallocation of resources by retail banks.”
By Bron Suchecki, on April 25th, 2011
Commodity Online reports that the State Bank of Vietnam is putting further restrictions on gold lending and has asked commercial banks to cease lending gold and eventually to stop accepting gold deposits.
“Vietnam has already forbidden banks from lending gold for the production and trade of gold bars since October last year. But starting May 1 banks are not allowed to offer gold loans to jewelry makers either.”
“The new rule is an attempt to eliminate the role of gold as a means of payment in Vietnam, the central bank said. It noted that the government will, however, continue to recognize the right of citizens to have gold holdings.”
“Gold holdings by the public were estimated to be about 400-500 tons then, said Vietnam Gold Association. Vietnam has been among a handful of countries in which banking sector takes gold deposits – bearing some interest – and lends gold as a lawful monetary means to bank borrowers. However, this practice may soon end with new regulations from the central bank.”
Commodity Online has been reporting for some time about increasing restrictions on gold as its people increasing move to using gold instead of their fiat currency and with this latest move it sounds like Government sees a real threat brewing. I’ve had a view for some time that one will not wake up with gold suddenly banned – it will happen incrementally – and this behavior supports that view (although this could depend on country by country factors).
Vietnam I think will be worth watching – we may well be seeing a loss of faith in fiat (hyperinflation) developing in a country where there is an existing use of and infrastructure of gold as money. How the Government responds could give some indication of how others will, but it is a unique situation as few countries have populations that familiar with gold.
Interesting to contrast Vietnam’s approach with India (whose public is said to hold between 10,000 and 15,000 tonnes).
Indian bullion dealer RiddiSiddhi Bullions Limited (RSBL) has just launched a gold account with the option of allowing RSBL to lend your gold out on your behalf.
RSBL “will lend your bullion to various professional bullion market participants against adequate security … at the sole discretion of RSBL Commodities to decide whom to lend and for what time period.” As its fee, RSBL retains 10% of the income and will take liability for any defaults by borrowers.
Note that the account is not targeted at the average investor with the minimum purchase size for gold being 1 kilo.
By Claus Vistesen, on September 23rd, 2010
Unlike Mr. Market who seem to be in full risk-on mode at the moment I am a bit handicapped on account of an awfully slow internet connection which is why posting is unusually slim at the moment. Another part of the market which seems to be a bit handicapped is the usual suspects in the form of the European periphery which seems to be ever so slowly creeping its way back to the front line of the discourse after having stirred in the background. Perhaps this is a sign of the the market attention-deficit-disorder which follows naturally from the inability of anyone to keep track of all discourses at the same time [1], a point which Team Macro Man described recently described quite elegantly;
It’s a right old mess out there at the moment. There are so many broad macro themes all colliding at the moment it looks like a slow motion replay of a motorway pile up. Deflation meets printing presses, meets commodities, meets politics, meets intervention, meets civil unrest, meets desperation, meets Voldemort.
Perhaps, this was also why the FT’s Ralph Atkins felt that he had to remind us of something we already knew this morning but which is still at the crux of the economic issues in the Eurozone. Basically, the ECB would like to think that everything is fast returning to normal and that, by consequence, monetary conditions should follow suit. Apart from the obvious in the form of a gradual increase in the main refinancing rate (currently at 1%) this would also mean a gradual withdrawal of liquidity support to the European banking system and a dismantling of the possibility to post collateral to obtain liquidity.
Mais, plus ca change in Frankfurt as the same problem which has been nagging the past 2-3 years is still, well, nagging;
Overall lending by the ECB has fallen to about €600bn ($780bn) compared with peaks of up to €900bn. But the amounts have stabilised at high levels in those countries worst hit by this year’s crisis over public finances. Greek, Spain, Portugal and Ireland account for 61 per cent of the total, despite comprising only 18 per cent of eurozone gross domestic product.
And this is indeed a royal mess since obviously not all banks in the Eurozone are equally distressed but just as the single interest rate policy creates macroeconomic distortions so will an overall liquidity scheme create the same kinds of distortions on a market level. One would think they would have learned by now. The problem though is no laughing matter. Jacques Cailloux, European economist at the Royal Bank of Scotland makes a key point when he notes that while the ECB clearly knows which banks that are using the funding facilities because they really need and which who use it for arbitrage (borrowing at 1% from the ECB and invest in the widening periphery yields to the Bunds) it is very difficult to do anything about the latter as annoying and frustrating it might be for the ECB to be a part of. Of course, you start to make differentiated access to auctions either by positive or negative discrimination but the end result would almost surely be the downfall of a number of European banks since the market would interpret this, and rightly so, as a sign that these banks would not be able to survive as independent private entities.
Meanwhile, in market land and while the S&P500 tests new highs at around 1130ish the water is starting to boil under the Irish cooker just as you might have thought that Ireland was one of the better of the bench. Yields on 10 year Irish bonds rose to an all time high today nudging above 400 bps as worries mounted that the government would not be able to meet its otherwise fine and lauded austerity plan on account of a darkening economic outlook not to mention the odd bank bailout (this time being Anglo Irish’ turn. The problem is essentially that at some point you simply run out of line and as such, finance minister’s Brian Lenihan’s assurances over the weekend that Ireland would not only have no problem finding bid for its 1.5 billion euro bond offering today and that the market would get a final tally on the recapitalisation of Anglo Irish, the screw has so far kept turning.
On Anglo Irish, WSJ’s Market Beat raised a further concern today regarding Anlgo Irish;
In the coming days, Ireland’s central bank will also provide more clarity on the biggest bug bothering investors: The total cost to the government of winding down troubled lender Anglo Irish Bank Corp.
Investors will be watching not just the final tally, but also details on what could happen to holders of the bank’s senior bonds and roughly 2.5 billion euros worth of riskier “subordinated” bonds.
This is a point also recently made by John Dizzard in the FT and it goes to heart of uncertainty surrounding Anglo Irish and indeed the whole bailout mechanism since where it is all well and good that stockholders get buggered bondholders have, for now, in most cases been spared. The cost so far of bailing out the bank has been staggering for Ireland. To date the government has injected a full 23 billion Euros and Standard & Poor estimated back in August that this figure might rise to 35 billion Euros over time. Even at 25 billion Euros Dizzard points to the dizzying fact that this already constitutes 5600 euros for every man, woman and child in Ireland.
While all this trundles on the yields of the periphery continues to widen and apart from Ireland, Portugal has also found its spot in the market cross hair.
The real question to answer then is if and when Ireland (and Portugal) capitulates and goes to the trough of the European Stability Fund (chargin 5% for a loan) and/or the IMF. According to Goldman Sachs Erik Nielsen, anything beyond 5% (i.e. as a lingering yield on Irish bond offerings) would mean that they are cooked and this, remarkably and scarily, is even in the context of a country that is actually fully funded until mid 2011. However, with the underlying assumptions on the economic outlook almost certainly too positive and the butcher’s bill on Anglo Irish more likely to rise than fall this particular fact might mean very little. But this I reckon is already old news by now.
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[1] I intend to present a solution for this at some point so stay tuned!
By Ajay Shah, on August 13th, 2010
Much has been said about the astronomical SKS valuations and the personal fortunes of the original investors. Speaking for ourselves personally, we are not at all disturbed by how much money was made by whom. On the contrary, we are very excited that an area that was once thought to be the exclusive turf of, as Monika Halan (http://bit.ly/SquidorDevta) puts it so graphically in Mint, `the nexus of political doles and the rural bank branch system rotting under the weight of corruption and dysfunction’ thanks to pioneers like Vikram Akula, Padmaja Reddy and Udaya Kumar, has moved firmly into the domain of `mainstream commerce’.
People forget that we are a country of over 500 million very-very poor people, so very large amounts of equity capital are required in building an ecosystem of financial firms which will serve the poor of India. Now that the ball has been tossed up high in the air we are hoping that other people who also know how to build India sized businesses (Ratan Tata, Kumar Birla, Mukesh Ambani, Sunil
Mittal, Azim Premji and several others) take notice of this ball and hit it with all the power that they can bring to it. Curiously, the fact that so much money was made and was seen to be made is good news because this kind of money even makes the big boys sit up and take notice. Preventing Vinod Khosla or Vikram Akula from making some money is not going to eradicate this poverty, but the
power of their ideas taken to scale will.
Should we then not be concerned at all about how much money was made? For sure! Not because somebody got rich but because it calls into question the oft-stated MFI position that their high interest rates are only just about covering their high operating costs. A paper (http://bit.ly/Nvw6k) by Chaudhary and Rai shows that valuations are very sensitive to interest rates. They show that just a 1% decline in MFI interest rates leads to a Rs. 1.5 billion drop in valuation for an MFI with 500 branches. They also show that
should the large MFIs choose to cut interest rates by as much as 10% (from the over 30% per annum that most of them currently charge, to under 20% per annum), they would still deliver a holding period return on equity of over 25% per annum. The focus on individuals making money distracts our attention from this very important fact.
And attempts that are intended to bring about `orderly conduct’ (http://bit.ly/MFINCode) could have the consequence of preventing competitive forces from coming in and bringing these rates down there is a real need to make sure that this does not happen and to actively encourage intense competition amongst new and existing players. Experience, for example with housing finance in India, shows that this was the only reason why the rates fell and services standards improved without any dilution of credit quality. There is also an urgent need to bring in completely new models of financial services for low-income households (we are associated with one such attempt: www.bit.ly/LocalTouch). For example, the rapid scale-up of ATMs in India changed the entirely banking landscape by changing the very nature of the service models
Bindu Ananth (bindu.ananth@ifmr.co.in) is the President of IFMR Trust (and the corresponding author). Nachiket Mor is the non-executive Chairman of the Governing Council of IFMR Trust and the President of ICICI Foundation for Inclusive Growth. Views are strictly personal.
By Bron Suchecki, on July 8th, 2010
Those interested in this issue, which I have covered in this and this post, will find FOFOA’s latest post useful.
FOFOA agrees with Marx that “the history of all hitherto existing society is the history of class struggle” but says that he got the classes wrong:
The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. “The soft money camp” and “the hard money camp”. History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.
What is the relevance of this to gold? FOFOA argues that:
… when the soft money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when “soft money” collapses – and it ALWAYS collapses – there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.
… By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers. 
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