By Ajay Shah, on September 19th, 2011
Market making versus the electronic limit order book
 Exchanges in India all operate as electronic limit order book markets. There are no `market makers’; there is just a publicly visible limit order book. Anyone is free to supply liquidity, by placing limit orders. The person who places market orders is the consumer of liquidity: he pays market impact cost. [A guide to the jargon]. Prior to the rise of the anonymous limit order book, there used to be a great deal of effort on thinking about the market maker. Market makers played a big role in many old markets. E.g. at the NYSE, the `specialist’ was obliged to provide liquidity. RBI established `primary dealers’ thinking that they would provide liquidity.
These market structures involved complicated problems of measuring the liquidity provision by market makers, correctly compensating them, avoiding monopoly power in the hands of the market market, and enforcing against market manipulation by the market maker. The rise of the open electronic order book cut through this Gordian knot.
For many years, there used to be a debate about whether the anonymous open limit order book market (where anyone can provide liquidity) is better or worse than a market maker market (where limit orders can only be placed by one or more market makers). That debate died down in the 1990s with the success of the electronic limit order book. Market making on the electronic limit order book
But even on a limit order book, does it make sense to pay one or more market makers to provide liquidity? The public would be free to place limit orders, but one or more market makers would be paid to place limit orders.
The positive argument runs like this. In the life of every contract, at first there is a lack of liquidity as various market participants are reluctant to take the plunge and trade on an illiquid contract. This leads to a chicken and egg problem. Illiquidity inhibits participation, and the lack of participation is illiquidity.
From a regulatory perspectives, exchanges might try to make payments for liquidity provision (or outright turnover) by various underhand means. If that is going to happen, then it is better to have this come out into the open.
But there are also important problems that can come out by going down this route. The resources that an exchange puts into portraying tight spreads or high turnover could potentially be used to improve services for customers. Market participants would make wrong decisions about an investment decision when they see a product as looking liquid on screen, whereas this liquidity is actually artificial: the screen would be falsely portraying liquidity. When exchanges compete on payments to market makers, this can degenerate into a slugfest where the deepest pockets win.
The artificial liquidity pushed by mercenary market makers would tend to lull the exchange into complacence. In the absence of market making, the exchange would run harder to solve problems of market mechanisms and contract design, and to get the word out about the contract.
Recent developments in India
On 2 June 2011, SEBI chose to move ahead with the specification of a `Liquidity Enhancement Scheme’ (LES).
By these rules, LES is applicable for individual stocks where the trading volume on the last 60 days is below 0.1 per cent of the market capitalisation. (How would this be scaled to derivatives such as currency futures, where market capitalisation cannot be defined?) I think this makes sense. The LES would be used to kickstart liquidity when it is abysmal. The moment a small amount of liquidity comes about, the LES would step aside.
Based on these rules, NSE announced a program for market making on the derivatives products recently launched at the exchange: on the S&P 500 and the Dow Jones Industrial Average (launched in partnership with the Chicago Mercantile Exchange). These incentives are over and above the absence of charges by the exchange. I was disappointed to see a payment based on mere turnover. This would give the market maker an incentive to do circular trading and thus show a lot of trades. But turnover is not liquidity.
This program came into effect on 15 September. It may matter more in the coming week, given that new contract series start trading from tomorrow. Will it matter? How will we know that it mattered?
Derivatives on the S&P 500 and the Dow Jones indexes have gotten off to a surprisingly good start, even though there was no such program. This has perhaps been helped by unusual levels of volatility in the US after the launch of these contracts.
The early days of a contract can be a rollicking ride and even after these time-series fall into place, it will not be easy to tell whether LES was useful in the history of these contracts or not.
Similar thinking is taking place at BSE also: See Will BSE’s biggest initiative work? by Mobis Philipose in Mint. The text there — obligations such as providing two-way continuous quotes within specified parameters for quote size and spread — sounds good, but here also there are payments per crore of turnover. By and large, the payments being made at BSE look much bigger than those at NSE.
In the case of BSE, if LES is able to lift BSE out of zero market share in derivatives trading, even after the six month period has expired, then it would be a clear proof that the LES helped. So this experiment is unlike that of NSE where it will be hard to evaluate whether or not the LES mattered.
By Ajay Shah, on December 6th, 2010
I saw this interesting article about the mind-share of Nifty as opposed to the BSE Sensex. It is by Samie Modak and Muthukumar K. in
the Financial Express.
The NSE data for June 2010 shows that Nifty futures have peaked at Rs.0.36 trillion of notional turnover in a day (27 Jan 2010) and
Nifty options have peaked at Rs.0.89 trillion of notional turnover in a day (24 June 2010). Nifty has shaped up as one of the big
contracts by world standards. It is interesting to go back and read the original paper. Those were interesting times. Looking back, it
seems obvious that Nifty would dominate the derivatives market, but at the time, the outcome was far from clear.
This made me look at data on risk and reward of the alternative indexes. I start from the first data for Nifty Junior, which takes me back to 21 February 1997, thus giving data for 13.7 years.
|
Mean |
Volatility |
Ratio |
| Nifty |
12.99 |
26.37 |
0.4926 |
| BSE Sensex |
12.68 |
26.92 |
0.4711 |
| Nifty Jr. |
18.16 |
32.38 |
0.5608 |
| CMIE Cospi |
17.40 |
27.23 |
0.6391 |
Nifty and the BSE Sensex are a lot like each other.
The real surprise is Nifty Junior: Merely moving down from rank 1-50 to ranks 51-100 has given an enormous juice in the return and in the reward-to-risk ratio. But the volatility of Nifty Junior is also higher.
The CMIE Cospi index has roughly 2800 stocks today, and represents the broad market. It includes the Nifty Junior stocks and a host of other smaller stocks. But unfortunately, these numbers are not comprabale with the other three in that it includes dividends while the other three do not. With this combination of high diversification (giving a low volatility), small-cap stocks (which helps returns) and inclusion of dividends (which helps returns), it is not surprising that it scores the best reward-to-risk ratio.
In my mind, most of the claims of out-performance by active managers in India are purely about being invested in the non-Nifty
space. Nifty Junior ETFs are easily accessible and I get surprised that more people aren’t putting this into their investment strategy.
By Ajay Shah, on May 11th, 2009
Some examples
- Siemens Ltd. (14 Jan 2009) sold its IT division to its parent co. and came out with a matter of fact press release to the shareholders and the rest of the world saying it’s divesting a low-margin business. The consideration: Rs.449 crore, for a business that earned Rs.994 crore in revenues and Rs.73 crore in net profit, in effect valuing it at a modest P/E of 6 times. The very same business in 2007 had earned a net profit of Rs.160 crore. Why should Siemens sell this company for such a low consideration? Shouldn’t they be sharing the valuation report submitted by Grant Thorton with shareholders (so that everyone knows the basis for such a low valuation), just like they send their Annual Report? [link]
- Lok Housing & Constructions Ltd. (30 Jan 2009) made an announcement saying all the profits it earned in the last three years will have to be written back. Reason: Customers canceled contracts. Action taken by the Company: It mutually agrees to let legally-bound customers cancel all the contracts, thereby saying that all the profits it reported in the last three years were non-existent! [link]
- Sterlite Industries (India) Ltd. (9 Sep 2008) Board cleared a proposal to restructure its business by transferring the Aluminum business (including stakes in BALCO & Vedanta Aluminum) and the power business (i.e. 100% stake in Sterlite Energy) to Madras Aluminum (a much smaller company with a mcap of less than 1/15th of Sterlite’s). Further, the proposal also included a tranfer of Vedanta’s (Sterlite promoters) 79.4% stake in Konkola Copper Mines in favour of Sterlite Industries for a 1:1 ratio. The transfer of this business would have resulted in a significant jump in Promoter’s holding in Sterlite Industries. Reasons for this restructuring as given by the Management: Increase in efficiency, simplification of corporate structure, and elimination of conflict of interest [link]. The point is not whether the such proposals are fair, but whether companies share sufficient information with shareholders so that they could make an informed decision on their investments. In the case of Sterlite Industries, given the scale of restructuring it was only fair on the part of the Company to disclose basic details like impact on the Profit & Loss Account, the Balance Sheet of each of the three companies, impact of increase in efficiency on profits and profitability, basis for valuing Konkola Copper Mines (one share of which was valued on par with one share of Sterlite Industries), etc. Media reports suggest that protests from certain large foreign funds and a big thumbs down to the share price pushed the management to cancel the restructuring proposal for the time being. [link]
- S R F Ltd. (16 Dec 2008) announced its decision to purchase two businesses of SRF Polymers (the main promoter company for SRF) for a consideration of Rs.151.8 crore [link]. Consider this: when the announcement was made, SRF Polymers had a market cap of Rs.64 crore. Further, SRF Polymers on a cumulative basis has not made any net profit in the last five years. So why should SRF pay Rs.152 crore for a company that is a). loss making, b). has a debt of Rs.130 crore (as of FY08) and is trading at less than half that value on the bourses any which ways? Important data point: SRF’s promoter SRF Polymer and SRF Polymer Investments own 45% in SRF), whereas the group’s real promoters (Mr. Bharat Ram and group) own 74% in SRF Polymers.
- Satyam Computer Services Ltd. (16 Dec 2008) tried acquiring two of its sister concerns Matyas Infra and Maytas Properties, offering handsome valuations for both companies with `un-related’ businesses, but with high promoters (read: the Raju family’s) holding [link, link]. The rest is history, but it was yet another attempt to short-circuit minority shareholders.
- D L F Ltd. (23 Mar 2009) may try to do something like SRF, according to the pink papers, which suggest that the Company is planning to take a controlling stake in DLF Assets, a company owned by DLF Promoters (the KP Singh family). However, there is no official announcement or proposal that the DLF Board had cleared to this effect. But, neither have they denied the news. In a response to a related article carried in the Business Standard [link], DLF said “The Company has been looking at various options from time to time; however, no definite option has been presented to the Board so far for its Consideration“. [link]. In another article dated 1 May 2009, it was reported that DLF has formed a committee of Independent Directors to look at options for DLF with regard to its relationship with DLF Assets Ltd. The Committee will look at various options, which includes a possible acquisition of stake by DLF. [link]
The big question is: Why should DLF buy a company for Rs.6-7,000 crore (as mentioned in the Business Standard report) that owes it more than Rs.5000 crore in dues? The same Business Standard report also makes a mention that the merger of DLF Assets is primarily being done to provide an exit to some of the funds who are invested in DLF Assets. Rumour or reality, we do not know. What we do know is that DLF is under significant financial stress right now. Consider this: For the quarter ended 31 Mar 2009, DLF reported a 74 per cent drop in revenues and a net loss (after adjusting for other income) of Rs.70 crore as compared to an adjusted net profit of Rs.2,141 crore in the year ago quarter.
- Ray Ban Sun Optics India Ltd. (30 Apr 2008) transferred its business of distribution and sale of various luxury frames and sunglasses (that includes Dolce & Gabbana, DKNY, Ralph Lauren, Oakley, etc.), other than RayBan to Luxottica India Eyewear Pvt. Ltd. (a wholly owned subsidiary of the Luxottica group, also the promoters of RayBan Sunoptics, upon the former’s instructions). Effect: Around 40% of Rayban Sunoptics’ revenues came from the distribution business. And even though it was low-margin affair, it did not require any capex from Rayban Sunoptics’ end, so in effect it had a fairly decent ROCE. But, yet it was transferred. After a couple of months, Luxottica de-listed Rayban by making a public offer at Rs.140 per share. Had this business included the trading business, would the minority shareholders not have received more consideration? [link, link]
- Zee Entertainment Enterprises Ltd. (22 April 2009), in its quarterly results press release, announced that it has increased its holding in one of its subsidiaries, Asia Business Broadcasting (Mauritius) Limited, from 60 per cent to 100 per cent. The deal involved a cash payment of USD 56 million (approx – Rs.280 crore) to some Resource Software Ltd., valuing the overall company at USD 140 million (10 times FY09 sales and 20 times FY09 net profit). What made Zee take this step when it any which ways controlled the Company given its 60 per cent holding? Why did it not choose to repay some of its debt on which it paid an interest of over Rs.130 crore in FY09? How justified is it to pay 10 times sales or 20 times profit, given the kind of turmoil we’ve seen on stock markets in the last one year? What does this company called Resource Software Ltd do, who owns it, and where is it located?
Last but not the least, the mysterious case of Orissa Sponge Iron:
Here’s a Company that is currently in the midst of a three-way takeover bid (bid details 1, 2 & 3), with each of the bidding companies willing to value the Company in the north of Rs.600 crore. That for a Company which in the last five years made a cumulative loss of Rs.5 crore. What’s more as of 31st March 2008, it had a debt of Rs.229 crore (which I think has now increased to close to Rs.300 crore, but that’s just a rough estimate based on the interest payments made by the Company in recent quarters).
So where is the profit potential? What are these companies paying for here?
Orissa Sponge has applied for iron ore mines and coal mines in Orissa and is awaiting some final leg clearances from the State Government. But, in the Annual Report for FY2008, the Company makes no mention about the size or the quality of ore in the mines (in a way that would help shareholders appraise the Company’s value and compare the same with its market capitalization). There are news/brokerage reports that suggest that the DCF value of these mines could be in the range of Rs.2000-4000 crore. But, they are all based on unconfirmed reports & estimates. But, if that is indeed the case, shouldn’t the Company be sharing information with minority shareholders to enable them to appraise whether to tender their shares in the ongoing bidding war for control?
Well, it seems that the takeover bid is not the only war the Company is involved in. There have been scores of reports in the media (link1, link2) about the promoters of Orissa Sponge Iron allegedly flouting SEBI’s takeover code and increasing their stake in the Company at various instances in the past. Let me try to simplify things here:
- Orissa Sponge Iron’s total promoter holding in June 2005 was 62.7%.
- This was increased to 69.3% by December 2006 (by way of conversion of warrants).
- The SEBI takeover code (that was prevalent before the changes made in 2008) mentioned the following about trigger points for making an open offer:
- Regulation 11(1): Between 15% to 55%, an acquirer may consolidate to the extent of 5% in any financial year without an open offer. Any acquisition beyond 5% in a financial year would entail an open offer of 20%.
- Regulation 11(2): Any acquirer who is at or above 55% but below 75% cannot purchase any additional share or voting right without making a public offer for 20%.
- Regulation 11(2A): Any acquirer holding above 55% but below 75% who desires to consolidate his holding may do so by means of an open offer to the extent of the applicable limit for continuous listing.
From the above it is quite clear that the Takeover code requires an open offer to be made in case there is an increase (even if by a single share) in the share holding of an acquirer who is at or above 55% but below 75%. While calculating shareholding, the rule allows the shareholding of persons acting in concert to be added up. In Orissa Sponge’s case, the matter is still open for debate, but there is a possibility that the acquisition violates the Takeover Code assuming that it is proved that all the various entities which were classified as promoters were acting in concert. Further, Orissa Sponge Iron included Unitech Holdings (that held around 7-8% stake in Orissa Sponge during the aforesaid period) as a part of Promoters & Persons Acting in Concert group, despite Unitech group’s claim (as stated in a clarification provided by Mr. Sanjay Chandra to DNA) that it was merely an investment in their personal capacity and that they were never involved in the management of the Company [link]. Funny, Orissa Sponge Iron includes an investor as a promoter, wonder why?
The table below indicates changes in the holding pattern for Orissa Sponge Iron and it makes for quite an interesting read.
|
Promoters Hldg as reported |
Promoter’s holdings |
Addnl share / |
Avg price |
|
(%) |
(shares) |
(net of Unitech investment) |
sale of shares (-) |
(of H, L & Cl.) |
| Jun’05 |
62.70 |
7452849 |
6529949 |
|
59 |
| Sep’05 |
62.70 |
7452849 |
6529949 |
0 |
53 |
| Dec’05 |
62.75 |
7467949 |
6545049 |
15100 |
42 |
| Mar’06 |
59.10 |
7736465 |
6813565 |
268516 |
28 |
| Jun’06 |
-NA- |
-NA- |
|
|
|
| Sep’06 |
66.00 |
8639485 |
7716585 |
903020 |
24 |
| Dec’06 |
69.31 |
10049485 |
9126585 |
1410000 |
28 |
| Mar’07 |
-NA- |
-NA- |
|
|
|
| Jun’07 |
62.81 |
9106865 |
9106865 |
-19720 |
34 |
| Sep’07 |
62.71 |
9093385 |
9093385 |
-13480 |
72 |
| Dec’07 |
45.07 |
9013628 |
9013628 |
-79757 |
500 |
| Mar’08 |
43.80 |
8759459 |
8759459 |
-254169 |
444 |
| Jun’08 |
43.80 |
8759459 |
8759459 |
0 |
239 |
| Sep’08 |
43.80 |
8759459 |
8759459 |
0 |
229 |
| Dec’08 |
41.51 |
8301249 |
8301249 |
-458210 |
105 |
| Mar’09 |
48.98 |
15301249 |
15301249 |
7000000 |
143 |
So where do all the aforesaid instances leave the minority shareholders?
Quite predictably, they remain at a serious disadvantage vis-a-vis the promoters. Promoters may claim that since they own a majority stake in the Company their interest is equally (or more) affected than those of the minority shareholders. Maybe, the argument has some merit. But, are the minority shareholders so unimportant that Company’s do not even share details & justifications for large and important transactions like hiving-off of business units (as was in the case of Siemens, Rayban, et al) or restructuring of businesses (Sterlite) or ownership of strategic assets whose value is significantly greater than what reflects on the Company’s books (Orissa Sponge Iron’s mines)?
What can we do?
- What the regulators need to do is make it mandatory for listed companies to share key material information that relates to important transactions like Business/Capital Restructuring, Scheme of Amalgamations, Purchase/Sale of Assets/Investments to related companies, etc. Usually, in such cases various reports are prepared, viz. a detailed Scheme of Arrangement/Amalgamation (to be submitted to the High Court) or detailed valuation reports (prepared at the behest of the Company by external agencies). Companies should be required to share these with their shareholders just like it is mandatory to send Annual Reports.
- Make the transaction a transparent one, based on which a shareholder can appraise his/her investment. The way to do this was shown to us by Tata Motors, where most of the details of its takeover of JLR were made available to shareholders [link]. We may agree or disagree with Tata Motors on the merits of the acquisition or the price paid for it, but at the end of the day the investor had the option to appraise his or her investment and decide whether to stay with them or walk away.
- Detailed background information of all those involved in a purchase/sale transaction should be provided. For e.g. in case of Zee Entertainment, the Company paid about Rs.280 crore to a company called Resource Software for a 40% stake in Asia Business Broadcasting (in which it already had a 60% stake). Now, what is this Company? What does it do? Where is it located? and who are its promoters? These questions are not to doubt Zee’s intentions, but its a question of being transparent with your shareholders.
- Companies that hold Analyst Meets (one to one or in the form of a gathering) or conference calls usually share a lot more information than that available in the Annual Report or on the Company’s website. And, in most cases this information is not available to minority shareholders and is neither available in public domain. Regulators must make it mandatory for listed Companies to share the transcripts of such analyst meets and concalls in public domain and that too within a stipulated time frame. Again, just the way companies like Tata Motors do it [link].
By Cheryl Grey, on May 8th, 2009
Okay, so the U.S. is solidly in recessionary territory. The fundamental economic data are lousy, trends are down, consumers and businesses are retrenching, and nobody is happy. We know that, if current forecasts are accurate, the fourth quarter of 2008 will be the worst in terms of economic performance and at least the two following quarters aren’t going to be all that pretty, either.
What we now want to know is, how will we know when the worst is over? What signposts will show when the bottom has been reached and the light ahead isn’t the proverbial catastrophic train wreck heading right at us?
Watch the stock market indices such as the Dow Jones Industrial Average and the S&P 500. Market movements can influence the economy, but being forward-looking, stocks tend to move first and therefore can serve as a leading indicator (explained below) for what people call “the real economy.” An examination of market movements during previous recessions shows that stocks tend to start their rally about four to six months before a peak forms in continuing claims for unemployment benefits.
For example, in the recession of 1981–82, these claims peaked at 4.713 million in November 1982; however, the Dow Jones bottomed out in August and rose over 300 points in those interceding four months. This pattern repeated in 1990–91 and 2001, as well. So when the DJIA quits jittering between 8000 and 9000 and actually begins rising on a sustained uptrend, it will be a good indication a bottom is forming in the labor market and therefore the real economy, too.
Watch the leading indicators. Most economic announcements concern lagging indicators, which trail the data they illustrate by a matter of weeks or months. While the time is necessary to allow for tabulations and calculations, reading about last month’s industrial production figures (down 0.6% in November) is old news at best.
On the other hand, some economic indicators are designed to show, not where the economy has been, but where it seems to be going. These leading indicators are often surveys of consumers or business managers, most of whom know their budgets to a hair, and the readings published therefore reflect their financial expectations for the coming months. The best leading indicators are consumer confidence surveys, such as those published by the Conference Board and ABC News, and commercial indicators such as business confidence surveys, purchasing managers indices, and industrial new orders data.
The two very best are the U.S. Leading Economic Index (LEI) of the Conference Board, and the Purchasing Managers Index (PMI) of the Institute for Supply Management. The LEI pulls from forward-looking data such as building permits, interest rates, manufacturers’ new orders, stock prices, and initial claims for unemployment benefits, and calculates them into a single headline figure for easy comparisons. It’s currently at a level not seen since 1991 and has fallen 3.7% from this time last year.
The PMI unfortunately doesn’t make for more cheerful reading. This survey of manufacturing purchasing managers looks at inputs such as commodities prices, new orders, order backlogs, employment plans, and customer inventories, and calculates a headline figure as well. A reading of 50 indicates the U.S. economy is stable, while readings above that point to expansion and readings below point to contraction. The current November manufacturing PMI stands at 36.2, the worst it’s been since May 1982, with significant gains required to indicate an economic bottom is in place.
Finally, watch payroll data, not unemployment figures, which can be skewed by seasonal factors and the workforce participation rate. Employment figures, on the other hand, point to jobs created and people back at work, and a rise there is generally followed fairly quickly by a similar rise in retail sales.
Like all predictions, this one carries certain caveats, the biggest being that another shock to the global financial network would be much harder to absorb at this stage of the economic game. But indicators don’t lie, and sooner or later that light ahead really will be the end of the tunnel. Watch for it.
By Cheryl Grey, on November 11th, 2008
When the U.S. government refused to bail out Lehman Brothers and no buyer could be found for the tottering investment bank, traders and investors around the world realized something terrifying: their profits—worse yet, their capital—were at risk, and the Fed’s lack of action proved no one was going to save them.
Results Round One
The result was panic. Faced with massive losses, these international investors yanked their funds from commodities, stocks and other investment vehicles in emerging markets around the globe and bought bonds offered by developed nations. Any investment seen as riskier than a 90-day T-bill was spurned in what has come to be called “the flight to quality.”
The result of that result was the unwinding of carry trades. In that scheme, traders take out loans in nations with low interest rates (such as Switzerland at 2.0%, the U.S. at 1.0% or Japan at 0.3%) and invest the funds in nations with high ones (such as New Zealand at 6.5%, South Africa at 15.5% or Iceland at 18%), thus earning the “spread” between those rates. But currency fluctuations, caused by shifting interest rates or decreasing economic potential in the investment nation, put both profits and capital at risk, and during the flight to quality traders dumped these investments and repaid their loans. In the process, the South Korean stock market collapsed 40%, Ukraine’s 60%, Iceland’s 90% (see chart of the Icelandic index above, October 17). The Russian market ceased trading for two days, hoping for stability to emerge; it didn’t happen.
The next result was the appreciation of the U.S. dollar against every currency in the world with the lone exception of the Japanese yen. Since mid-August, when the unwinding of carry trades began in earnest, JPY has appreciated almost 18% against USD as these international traders “sell” the dollar and “buy” the yen to repay their Japanese loans. The yen rose so high that the affordability of, and therefore the profit from Japan’s exports, slumped, with Toyota’s profits shrinking 69% in the most recent quarter and Sony’s by 72%.
Results Round Two?
And that’s the good news.
With the worst of the flight to quality complete, most major currencies appear to be stabilizing against USD, albeit at lower than anticipated levels. The Euro, which was worth an historic high of $1.60 as late as July 14, lost $0.37 in value by October 28, or 23%. The U.K. pound, which was as high as $2.11 a year ago, currently trades at $1.56, down 26%. These currencies are also shifting in value against each other. The exchange ratio between the Euro and the Swiss franc, another traditional safe-haven currency in times of financial stress, has fallen 12.6% since July 31.
In terms of international finance, these are huge moves, particularly for emerging economies. With the rise of globalization, loans of all varieties—corporate, individual, inter-governmental—are now made across national boundaries and across currencies. As currencies shift into new relative value ranges, the payment terms of these loans shift to follow, meaning that Swiss loans to Euro-funded nations are now 12.6% more expensive than they were three months earlier.
Current estimates place 90% of all Hungarian mortgages written since 2006 in Swiss francs. With the Hungarian forint down 17%, these mortgages are ballooning in cost just as their adjustable-rate counterparts did in the U.S. when the Fed raised the prime interest rate. The financial world already knows the rest of that story. Rather than waiting for the rush of defaults and foreclosures both corporate and domestic, the International Monetary Fund, European Central Bank and World Bank loaned Hungary 20 billion Euros (US$25.5 billion) on October 29. Loans to Ukraine, Pakistan, Iceland and other nations are following quickly.
But similar circumstances in Romania, Bulgaria, Serbia, Lithuania, Latvia, Croatia, Poland, Slovakia, Belarus and the Czech Republic mean the second round of the financial crisis may be happening across the Atlantic. Even worse, the story is repeated in parts of Asia and in Central and South America. All told, a total of US$4.7 trillion in loans cross these international borders, and Western European banks hold three-quarters of those notes, an amount that dwarfs U.S. banks’ exposure in the first round of that crisis. In Austria alone, bank exposure to these notes is 85% of national gross domestic product and in Switzerland it’s 50%.
Steve Forbes may believe the worst is over. Europe doesn’t necessarily agree.
|
|
Most Popular Posts