Iceland’s Dangling Recovery Bait
2012 May 13 by admin
Years after initiating developed Europe’s resort to IMF and bilateral official rescue Iceland on 3 percent GDP growth from fishing and tourism earnings repaid 2013 obligations early and regained investment-grade status form all three main rating agencies, lifting thinly-traded bonds and stocks. Consumption also improved on household debt restructuring progress which has spurred real estate values, although the big legacy commercial banks from the crash still have 25 percent NPL ratios and court rulings on inflation and foreign exchange-indexed instruments could aggravate the burden. The currency has been steady against the dollar and euro on capital controls which by law will last through the end of next year, with the central bank mounting occasional interventions from its $9 billion in reserves. Inflation has subsided from the 6 percent range on commodity and wage demands and the current account is in modest surplus. External debt could drop to 150 percent of GDP by mid-decade, and liability management could be aided by another planned Eurobond tap in the coming months. Despite a primary surplus, budget balance is elusive with social welfare and local government funding commitments, according to the IMF’s latest Article IV picture. Monetary policy should also be tightened in advance of “gradual” capital account re-opening, it further recommended. Corporate debt equivalent to half of economic output has already been written off and independent supervisors are now monitoring bank health with capital and liquidity positions still a concern, and the state mortgage lender in bad shape. The experience offers “key lessons” for European countries that subsequently entered fiscal adjustment programs, including the importance of protecting vulnerable income groups and imposing burden sharing on private creditors. However numerous risks linger in the Fund’s view with the European Free Trade Association due to decide whether the Icesave non-resident reimbursements violate deposit insurance directives and the imminent prospect of large onshore capital outflows with even incremental liberalization.
At the opposite end of regional arrangements, Ukraine has not met gas pricing and other conditions to unblock multilateral assistance as a Eurobond return was indefinitely postponed and Russia’s VTB bank may not renew a $2 billion loan after June. Foreign reserves are down to $30 billion or 3 months’ imports as the central bank tries to maintain the 8/dollar hyrvnia value on a doubled current account deficit as a portion of GDP. Local government paper yields are at 15 percent and euro-denominated alternatives have been introduced to sustain appetite. Overseas banks that control almost half the system have slashed operations, with a recent S&P report citing “extremely high” credit risk with loans/deposits in excess of 150 percent. Opposition party chief Tymoshenko and allies have been jailed on corruption charges as President Yanukovych tries to skirt international condemnation and default until October parliamentary elections likely prompt more eruptions.
European Banks’ Deleveraging Mechanics
2012 May 7 by admin
After previously ruing the ramifications of cross-border bank rebalancing for emerging Europe, the April edition of the IMF’s Global Financial Stability Report cited a specific figure of $2.5 trillion or 7 percent of total assets on near-term deleveraging to meet business and regulatory objectives. One-quarter of balance sheet shrinkage will come from lower lending and the remainder from securities and other portfolio sales, with a baseline assumption of 2 percent European credit withdrawal which could cause “serious damage” if broad and simultaneous. 80 percent of the cuts have already been detailed in large bank group plans prepared for shareholders and the EBA to attain prudential and return standards. On a geographic basis Asia and Latin America are included in pullbacks, while wholesale segments like commodity, project and trade finance also fall under the hammer. In late 2011 euro-area banks slashed emerging market lines almost 10 percent according to the BIS, and in contrast with the post-2008 crisis the shift may now be structural and “persist for a longer period” the Fund believes. It notes on the positive side that export credit has held up globally with Chinese and Japanese institutions in particular filling the recent gap. Emerging EU members will see a 5 percent drop in private credit over the next two years at a delicate juncture where currency depreciation and high foreign ownership of local debt already pose vulnerabilities. Sovereign debt troubles there could bring systemic risks to Austrian and Belgian parents and magnify capital flow volatility in other regions, the review warns. Brazil, China and other destinations are in “advanced stages” of their own credit booms with 20 percent-plus annual growth requiring internal industry and monetary policy adjustments which would be complicated by external shocks. Their government instruments may eventually enter the worldwide “safe asset” category which has narrowed 15 percent or $10 trillion with OECD country downgrades and the collapse of the securitization market. In developing economies bank holdings of state paper can be at 20 percent of the overall portfolio whereas only Japan has such concentration among industrial powers. Lagging size, infrastructure and legal recourse remain impediments to achieving haven status as emerging market financial depth is still just 20 percent of the global total although the GDP portion is twice that amount.
To challenge the latest ratings direction European officials have called for launch of a new agency under their auspices while Germany’s Bertelsmann Foundation has designed a blue-print for a non-profit alternative that would be operated in all regions drawing on an initial $400 million endowment. It would apply traditional creditworthiness alongside a series of proprietary governance and transformation indicators that could better define sovereign grading as a public good after another burst of bad private determination.
Greece’s Escape Clause Cues
2012 May 2 by admin
A month after completing a signature bond swap which imposed a record loss while retroactively altering contracts and subordinating private creditors in a perilous Euro-zone precedent, the Greek central bank warned that future membership was in doubt as this year’s GDP drop was put at 5 percent, as the European Investment Bank began inserting drachma conversion clauses into infrastructure project documents. Local banks took a EUR 25 billion haircut and will need at least twice that amount in recapitalization under the second EU-IMF program, as Cypriot lender without that backstop scrambled to absorb similar damage. Around EUR 5 billion in foreign law instruments were not exchanged and holdouts may try to press their case in light of a New York decision in the lengthy Argentina fight ordering pari-passu payment of claims. The US government has filed a brief against the interpretation and officials in Athens stress they lack funds to cover the whole amount. A large redemption comes due a week after elections in which neither of the two main parties will be able to command popular support according to opinion readings which show strong extremist inroads. Further budget cuts must be found by June for next year following the latest Troika review, with provisional data indicating a 9 percent of GDP deficit. The current account gap will fall slightly from that level in 2011, while bank deposits off EUR 70 billion since the crisis onset continue to flee the system. In Portugal, which has also slipped back into the emerging market class after removal from world bond indices, the external balance has likewise improved and several privatizations have occurred. Corporate and household debt burdens far outstrip the public one at 115 percent of output, and 15 percent unemployment will be aggravated by labor reform opposed by powerful unions. The next big commercial bond amortization is in September 2013 when access is to be regained, but investors remain dubious of that outcome as well as the state’s honoring of numerous company borrowing guarantees.
In traditional emerging Europe, Hungary was placed at the top of the IMF’s list for bank and sovereign spillover as corridor negotiations over a new facility unfolded over its spring gathering. The EU has reopened the way for assistance after clarification of central bank law changes and submission of a revised fiscal adjustment blueprint which envisions near zero economic growth this year. The benchmark interest rate was kept at 7 percent despite the forint again touching 300 and medium term bond yields almost 9 percent, as negative retail sales choked consumption. To meet the 3 percent of GDP convergence target a new financial transaction tax will succeed the special one applied by Prime Minister Orban whose opinion polls now single out reckless decisions.
Turkey’s Power Projection Pushbacks
2012 April 27 by admin
Turkish stocks finished Q1 with a solid European showing after drifting on continued confusion over political and geopolitical stands and monetary and exchange rate policies as prime minister’s Erdogan’s health also invited doubts with scarce public appearances. Diplomats have led the charge to sanction and oust the Assad regime as Istanbul hosted an international meeting of ‘free Syria” groups and supporters considering weapons aid. The military at home again came under condemnation from the ruling party after alleged coup plotting as human rights abuses during its time in government decade ago were recalled with victims still seeking compensation. The grip on journalists which has included fines and detentions relented on EU criticism as writers investigating the ties between the government and the Gulenist Islamic school movement were let out of jail just before facing trial. Exposure of the relationship provoked a purge of the police and judicial ranks as new intelligence service heads were also installed. Skirmishes with Kurdish forces resurfaced and officials were drawn into a rancorous debate in France over legislation marking Armenia’s World War I losses and purported Turkish ethnic brutality often labeled genocide. 30 years after the army changed the charter constitutional reform remains a major agenda item despite the absence of a super-majority to facilitate a possible switch to a powerful presidential system. In the regional stakes, relations with Iran have cooled as it still backs Damascus and companies and banks are pressured to join the oil and financial embargos against its nuclear program and NATO maintains an important base as airstrikes are contemplated against Tehran. Its stock exchange has dipped on the tighter sanctions which have pummeled the currency and prompted the central bank to lift benchmark rates to 20 percent as a string of planned privatizations otherwise drains liquidity.
Turkish monetary head Basci has stood by the unorthodox approach using multiple tools in an effort to slow double-digit credit growth and reduce inflation to the 6 percent target, and added a twist as the weekly repo moved from a quantity to price model and then was suspended. Consumer lending has dropped markedly at 20 percent rates, which have also managed to curb import demand to tackle the 10 percent of GDP current account gap. A firmer lira has diminished the intervention need for dipping into reserves, which now cover only 4 months of goods purchase. Heavy domestic debt redemptions were successful over the quarter while foreign issuance diversified to the Samurai market. Although economic growth will halve from last year to around 4 percent, unemployment is under 10 percent. The primary surplus has upheld fiscal discipline in the absence of a responsibility law despite sudden attention to the glaring lack in other realms.
The Vienna Initiative’s Extended Strains
2012 April 10 by admin
As official and private sector parties grapple with a specific formula to adapt the 2009 Vienna Initiative’s voluntary bar on bank cross-border “disorderly unwinding,” separate working groups have reported on NPL and Basel III-related complications still frustrating Emerging Europe operating and resolution frameworks. The bad loan average tops 10 percent, which is probably understated due to missing data and low estimates, and is worst in the Southeast and Hungary with its additional Swiss franc mortgage load. Payments have been adjusted without interest capitalization, and portfolio sale and collection outsourcing are infrequent. A half-dozen countries have revamped business and household bankruptcy procedures and introduced out-of-court settlement, but they are the exception. Collateral enforcement is cumbersome and lengthy, personal insolvency is unrecognized, loss provisions are not tax-deductible, prudential loan classification is suspect, and distressed-asset markets are lacking, according to regional experts. Banks hesitate to take action on their own fearing competitive ramifications, and confidentiality and secrecy custom and practice inhibit progress. The BIS standards will go into EU capital adequacy and liquidity directives that for Central and Eastern members must accommodate high foreign ownership stakes, shorter-term wholesale liabilities, and less-advanced money and bond markets. Tier-one equity is typically good with limited hybrid resort, and minority interests when consolidated at the group level increase the capital cushion. The analysis suggests foreign currency risk be explicitly included in set-asides, and that the small-firm impact of ratios must be weighed as an overriding factor. Liquid assets should be broadly defined, and parallel macro-prudential measures harmonized between home and host jurisdictions. The new European Banking Agency should assume a lead technical role, and the so-called counter-cyclical buffer could be modified in light of emerging market member differences. The supervisor “colleges” should be regularly convened under its auspices for information-sharing and rule alignment, the paper advises.
The research points out the difficulties’ lingering toll on economic growth, which is anemic outside “overheating” Turkey. There Citibank is shedding ownership in giant Akbank, a main exchange listing, to meet post-rescue US Federal Reserve demands. In Hungary, Austrian parents continue to report network shrinkage and losses, although Raffeisen spurns talk of the need for a capital increase with overall pre-tax profit. In their outlying realms headquarters executives have tried to convince investors the situation has bottomed, especially when compared to Spain’s severe periphery case, where the government may again inject cash to salvage the property-stuffed cajas. Russian state banks in turn may be on the acquisition march westwards toward troubled pockets after earlier buying their own Vienna outpost in the wake of a record $7 billion sovereign Eurobond placement. 1000 investors participated with a 30-year tranche available for an extended pan-European bet.
Hungary’s Piquant Goulash Tasting
2012 March 30 by admin
Hungarian debt and CDS yields again crept up as the EU followed through on its convergence aid suspension threat unless constitutional and policy changes are enacted by June. IMF backup loan talks stayed in limbo in advance of the organization’s spring meeting, and the OECD weighed in with a critical report highlighting recession and financial stress. It cited high sovereign rollover needs the next two years as “weak recovery” appears in the second half. Private sector debt reduction has hurt demand and investment is “subdued” due to uncertainty and the imposition of the “sizable bank tax and credit rationing.” Gross fixed outlays are down 25 percent since 2008 and medium term prospects are “bleak” without productivity gains to outstrip the aging population. The December 2011 burden-sharing plan to ease household foreign currency exposure insufficiently targets distressed borrowers, the agency believes. The Szell Kalman fiscal regime proposed in the Orban Administration’s early days did not define detailed cuts in public spending at near half of GDP, with local government employment overcapacity a key area. State transport companies, as evidenced by the Malev airline’s recent bankruptcy, continue to sustain heavy budget losses. Energy and property tax increases should replace special crisis levies and social security savings are also available. The new economic stability act sets a responsibility rule for mid-decade, but the council to enforce it is too politically-charged and multiple exceptions may counter the original intent. Monetary policy as well is no longer a technical exercise with central bank officials subject to spontaneous dismissal and replacement contrary to standard Brussels norms. Bank and personal balance-sheet cleanup must occur simultaneously to revive the intermediation function, but may currently conflict with mortgage forgiveness outcomes which have favored early repayment and caused foreign-run groups to “freeze or downsize” networks.
Objective criteria for the program such as negative equity and loan-to-income qualifiers are lacking, and tax write-offs could assume a greater role in loan restructuring. Recapitalization may be needed and a new financial services transactions charge under consideration may hamper the effort. Half of marketable debt is in non-resident hands with shorter maturities, and forint depreciation has essentially absorbed the windfall from private pension transfer. Many sectors including law enforcement and mining receive privileged retirement benefits not subject to recent general curbs on early access. Loan contracts are prone to “unilateral modification” and the credit information systems are “undeveloped,” according to the update. Regulators should be equipped with more autonomy and power under coordination from the overall stability board. In a separate assessment of state-run health care, the examination cited the absence of private capital returns and delivery and quality factors, and called for better organization and fund use to stir the pot.
The EU’s Astray Accession Axis
2012 March 27 by admin
New holders of a privately-placed Slovak sovereign bond shuddered as the populist Fico slate regained power with a clear party majority obviating coalition resort on a platform to abolish the flat tax regime and punish commercial and official corruption. The center-right government, which had initially withheld its EFSF contribution on philosophical grounds soon after joining the euro, had slid in opinion polls despite 3.5 percent GDP growth last year, as recession in the neighboring Czech Republic subsequently spilled over and a massive spying scandal was uncovered from the grouping’s previous time in charge. Its head, a former university professor with libertarian leanings, also alienated traditional politicians with unwillingness to compromise even though her core support was limited. The outgoing Finance Minister has warned of a return to fiscal laxity after the 3 percent of GDP deficit compact goal is met in the coming months. In Prague authorities have in turn shelved further pension reform and other adjustment plans to combat the flat economy now outpaced by 3.5 percent consumer inflation after VAT and energy cost hikes. The central bank has been on hold with the currency firm around 25 to the euro, while the current account deficit has improved slightly despite slowing exports as offsetting FDI will cover almost the entire gap.
Ex-Yugoslavia components Croatia and Serbia have recently been approved for longer-term EU membership after overcoming both debt and diplomatic hurdles. In the former in January two-thirds of voters approved entry on low turnout, with the single currency already dominating 80 percent of banking system activity. Output will contract this year on a slim trade base and slumping domestic demand, and the budget deficit will stay at 4 percent of GDP amid a struggle to retain ratings agencies’ bottom investment-grade mark. Italian banks dominate the sector and are in deleveraging mode. A new government was just voted in, with senior officials from the previous one facing prosecution for bribery and embezzlement. Unemployment is near 20 percent and donors have committed $2 billion in infrastructure funds in an attempt to provide jobs. Serbia’s entry timetable is likely more delayed until mid-decade after an impasse over Kosovo relations was temporarily resolved following the capture of accused war criminal Karadzic. GDP growth is an anemic 1.5 percent on inflation four times steeper, as the IMF precautionary program has been frozen on failure to meet fiscal targets heading into elections. The dinar has plunged to 115 to the euro, and 6-month T-bill yields are over 10 percent. Unlike in Croatia the stock market is up on privatization mandates which have been dashed in the past, but Brussels may now emphasize as an updated Belgrade sanction.
Ukraine’s Spilled Cup Condemnation
2012 March 13 by admin
Ukrainian shares were relatively flat on the MSCI index as the current account deficit hit a post-crisis high of 5.5 percent of GDP last year due reportedly to Euro football championship import needs, and jailed opposition leader Tymoshenko was visited by international physicians demanding she receive urgent medical care. The trade claims, combined with official intervention to support the currency, brought foreign reserves to $30 billion to cover only 60 percent of short-term external debt. A $2 billion loan was renewed by Russia’s VTB Bank and another $500 million bilateral facility was taken for winter gas supplies, but $3.5 billion is due in IMF repayment in 2012 as the suspended $15 billion program awaits energy price and other politically sensitive fiscal shifts heading into October parliamentary elections. European banks continue to pare their local lines as non-performing loans stand at 15 percent and FDI otherwise is lackluster. Metals exports rely on Asian industrial trends and agriculture has again been hit by a deep freeze. GDP growth is forecast at 3 percent with consumption as a main driver, while inflation may be double that print and could catapult with eventual subsidy removal under Fund conditions. The interbank rate was yanked to 15 percent in January as liquidity evaporated and rumors spread of impending devaluation from the 8 hyrvnia to the dollar zone following a Moody’s outlook downgrade to negative. Credit may again increase on recovering deposit inflows, but accountholders recall the 2009 imposition of capital controls to prevent bank runs and have yet to regain confidence. Further privatizations may be attempted after the state phone company selloff to satisfy multilateral mandates but sweetheart oligarch deals for the soccer cup event have since drawn popular criticism.
With the sovereign rating cut, a Eurobond issue as in mid-2011 is unlikely to be repeated and VTB’s $2 billion loan has only been rolled over until June. The institution itself seeks additional state funds after the expensive takeover of scandal-ridden Bank of Moscow and its faltering share price after a “people’s IPO” had been injected into the presidential campaign with Putin’s call for a retail investor-only buyback. The lender’s Eurasia Union engagement has also been questioned in Belarus, which has also been unable to come to terms with the IMF under its authoritarian pariah leader Lukashenko. The currency has lost three-quarters of its value and inflation is over 100 percent, but the regime continues to spurn liberalization moves while recently ordering salary hikes. Putin too campaigned on a platform of minimum wage rises and higher defense spending to reprise the seat of power in defiance of street demonstrators and approved challengers including the business titan Prokhorov. Capital flight is still at an estimated $10-15 billion monthly and a proposal to impose withholding tax on corporate overseas issuance is designed to staunch balance of payments and fiscal leakage rocking the boat.
The Baltics’ Beguiling Bragging Rights
2012 February 21 by admin
With the rest of Europe foundering Lithuania started the year with a major issue and Estonia reaffirmed its euro entry decision as Latvia exited its IMF program with good marks and welcomed further formal monitoring. Unlike cross-border owners elsewhere Scandinavian giants like Swedbank reiterated their intention to keep operations in place to participate in recovery and apply debt workout expertise. Norway’s sovereign wealth fund hinted at greater sub-regional public and private equity exposure in a continued diversification strategy, and pioneer managers like East Capital highlighted smaller company healthy earnings as near-term portfolio favorites. In their final review Latvian officials stressed the intention to meet stricter revised EU stability and growth pact criteria for single-currency eligibility by 2014. Fiscal and inflation performance as well as business, labor and education conditions will be improved, despite the temporary deposit and payment freeze imposed by Krajbanka’s malfeasance and shutdown which also affected foreign units. GDP growth could halve to 2.5 percent this year on “trading partner stagnation” as the current account reverts to slight deficit. Inflation should drop from 4 percent to 2.5 percent as nominal wages continue to shrink with unemployment at 15 percent. The budget gap will narrow to 3 percent of GDP on better tax compliance, a financial stability levy increase, cuts in central and local government spending, and social security adjustments. A top priority is “fighting the grey economy,” according to the letter of commitment even though the revenue result is “uncertain.” A fiscal responsibility law will enshrine medium-term discipline despite calls on state coffers to honor Krajbanka’s obligations and assist Baltic Air alongside commercial investors. These stakes will be sold off in future privatizations under an overall government enterprise good governance thrust which could place private pension funds in an enhanced oversight role.
Domestic borrowing will preserve benchmark maturities and combine with a return to international capital markets that began with a June 2011 Eurobond in an attempt to minimize rollover risk. The narrow band exchange rate will stay intact until Euro adoption with interest rates converging toward ECB levels. Higher bank capital standards will follow new EU regulations and consumers and supervisors will receive additional powers and protections. Troubled institutions from the 2008-09 period will continue along their resolution path with the Mortgage Bank to be divested and replaced with a s single development lender and Citadele to get final bids by the end of Q1. The residual Parex Bank is still the subject of numerous lawsuits and criminal inquiries against the former majority shareholders. International hedge funds have accused the government of bungling investigations and harming their interests in a record unworthy of boasting.
Romania’s Chafing Chill Wind
2012 February 15 by admin
Romanian bond issuance was doubled in January as authorities grappled with weeks of worker anti-austerity hostility amid record low temperatures and snowfall. The creaky coalition government may have to activate its IMF precautionary line and face another round of no-confidence votes as GDP growth could halve to 1 percent on slumping exports, 70 percent headed to the EU. The World Bank may chip in $1 billion in budget support tied to further privatization, labor and energy sector efforts as bank lending, dominated by foreign-owned units remains flat. Higher portfolio inflows will be needed to bridge the stubborn current account gap and were urged by famed Franklin Templeton equity fund managers hired to oversee listed state investment pools. The banking system is likewise under strain in Bulgaria which entered the EU at the same time as non-performing loans are 15 percent of the total. Greek parents own the biggest operations and regulators have tried to calm withdrawal fears by citing their continued profitability. A coal industry strike was settled as a minority stake in the state energy company is to go on the block by year-end. A sovereign Eurobond issues is slated for the coming months, and the country offers a precedent for GDP-linked paper that may feature in an eventual stinging private creditor “haircut” for Greece under negotiated non-default swap terms. The so-called Troika insists on a nominal 3.5 percent level coupon to promote debt sustainability as they mull a second bailout package before a steep looming March commercial repayment. They have however split on the possibility of the ECB absorbing losses under equal treatment practice, which the IMF has posed as a workout element. Athens even under caretaker technocrat rule has routinely missed key deficit and structural targets, and the Germans have floated the idea of an external fiscal overseer with new elections scheduled for April.
Peripheral bond panic is now entrenched in Portugal, which like Greece was in the emerging market category pre-euro, as 2-year yields were 20 percent before central bank buying. In an historic twist Brazilian investors and advisors have flocked there to share their experience and scout prospects. Angolan banks linked to its long-serving president have acquired assets as the incumbent may be closer to designating a successor after naming the state oil monopoly head as a key economic planner. The country entered an IMF program after the 2008 crisis, mirroring the path followed by Hungary which has reaffirmed second rescue intentions with dilution of financial supervisor consolidation plans despite Article IV report reference to “ambitious objectives” that may clash with the arrival of “adverse scenarios,” especially if mainstream political and policy tendencies are cast as enemies.