Fun House, Santa Cruz, California Beach Boardwalk
Don't you love farce?
My fault I fear.
I thought that you'd want what I want.
Sorry, my dear.
Kick out the clowns.
Get rid of the clowns.
Don’t bother, they're here.
• Stephen Sondheim
Where we find ourselves today has just about all been entirely predictable, as readers of The Automatic Earth know only too well; we've predicted most of what's happening now pretty accurately (going forward, remember what we've said about the dollar and about gold). Not predictions of the exact timing, but that's not the essence, except perhaps when you're a day trader; but even they have children.
The essence is the very simple fact that a debt crisis can't be averted with more debt (again, barring warfare, zero-point energy and meteor strikes). And that a debt crisis of the present magnitude inevitably leads to a credit crunch that paralyzes entire economies, in this case even the whole global economy as we have come to know it.
Once you accept that, measures completely different from what we have seen so far and what is now being touted once more, are called for. But we're not getting these different measures; it's as if those who "lead" the world are able to live and think in two dimensions only, whereas comprehension of a third dimension is needed to understand the issues at hand.
All these so-called leaders refuse to accept the possibility that monetary and fiscal policy may not hold the tools to fix the mess and get back to normal, or whatever passes for it. Yes, there’s a political crisis. But it's not that they can't get their act together to dump more public funds into the alleged right places, it's that dumping public funds is the only measure they can think of.
The underlying idea is that if banks' assets (debts) would be marked to market right now, the banks would be broke. By injecting trillions more, the hope is that asset values will recover. Still, that is not what has happened so far; the opposite has happened. It's the notion that markets are cyclical, hence they must come up again. But even if that's true, cycles can be long, and the banks don't have decades to save themselves.
Short version: by issuing trillions more in debt, governments and central banks -apparently- hope they can turn around financial markets, and have them recover to heights that would turn today's losses into tomorrow’ profits (or at least more bearable losses).
There are lots of voices that will tell you that we didn't need to be where we are, that things could have been done: (If Leadership Fails, Prepare for Recession!). They all mean more or less the same things: capital injections into the financial industry. A financial industry that is by and large broke and now depends on money from governments and their taxpayers all of whom are by and large broke.
Amidst all the fear and panic and selling, let me repeat what I've said a thousand times by now: there is no way out of this crisis that does not involve defaults on debt, restructuring of debt and bankruptcies caused by debt. Nothing else will achieve anything other than window dressing. In other words: all we've seen so far has been window dressing, and of a very expensive kind.
Yes, it’ll be tough, yes, it’ll be severe, yes, it’ll be brutal. But isn't it true that nothing's more brutal than having to listen day after day year after year to over-paid clowns lying through their teeth and other body parts and then in in the end still wind up in a situation that's in all likelihood even worse than where you would be if you’d have shut them out from the start?
The real problem is not, as a plethora of voices is now proclaiming, that governments have a hard time reaching consensus on recapitalizing the banking system. The real problem is that they are still, despite all the trillions squandered on exactly this approach, even considering doing so.
When we hear Lagarde, or Zoellick, or anyone of the "trusted" media pundits, say that all that's really needed is for "leaders" to "get their act together", what they mean is that a lot more money should be pumped into the financial system, and into broke governments. For people like Paul Krugman and his ilk, there is only one possible problem with stimulus measures: that they're too small. In other words: if a stimulus measure is large enough, it will solve any problem.
However, that idea of course carries its own problem: that the agent that does the stimulating will itself get into financial trouble. And who then will bail IT out? These ideas are based on the notion that no amount of debt can be large enough to overwhelm an entire financial system, or economy. That is not a very intelligent notion, if you ask me. It carries with it the idea that debt can be cancelled out with more debt.
The IMF’s Global Financial Stability Report this week suggested that European banks could be "saved" with a capital injection of perhaps around $400 billion. But the IMF, like everyone with a pair of functioning neurons, knows full well that that wouldn't save the banks. It would only and simply allow them to live another day or two. And then the game would start anew, exactly like it has over the past, let's say, 50 months. This is true of all stimulus, all QEs, all of it.
That is, unless a miraculous growth spurt appears out of the blue and against all the odds dictated by reality as we know it today. In other words, more capital injections simply and only mean more double or nothing gambling. We need restructuring, not replenishing. We need to sleep this one off, not get a refill.
This is not a simple difference of opinion, where one option is as valid as the other. There is no way the Lagardes and Zoellicks of the world can "know" that what they propose will achieve what they say it will. They refuse to believe - at least in public, let me add-, and therefore even consider, that the banks and indeed the entire system can go belly-up. And they also refuse to believe that throwing more money into the pit will not at some point be enough to fill that pit.
We need to get rid of these clowns. Unfortunately, I have very little faith that we actually will, if only because in the end, as much as our "leaders", we all are the clowns. As the Sondheim song goes: "Don't bother, they're here". Getting rid of the clowns is an almost entirely hypothetical situation, in the exact same way that solving debt with more debt is.
What governments need to do at this stage, and it's years overdue, is to ringfence their citizens, in order for them not to lose even more money than they already have. And then to combine that with a massive restructuring, with many defaults and bankruptcies, of the banking system (but without losing citizens' deposits) and the non-banking system that carry too much debt on their books.
Our present day "democratic" political systems are woefully inadequate to kick out the clowns and replace them with people that make sense, and are willing to do so for the masses.
But until we get a system that is capable of achieving this, we are in for a whole lot more misery.
Behind a painted smile.
Europe has six weeks to find debt crisis solution, warns Chancellor George Osborne
by Jonathan Sibun and Jeremy Warner - Telegraph
Global markets whipsawed higher and lower at the end of a tumultuous week as panic over a Greek default was tempered by hopes that politicians will step in to calm Europe's debt crisis.
The FTSE 100 closed up 25.20 to 5,066.81 on Friday, but ended the week down 5.62pc, with £78bn knocked off the value of Britain's blue-chip companies. While the index closed higher, it had fallen as much as 1.6pc earlier in the day, dropping through the pyschologically important 5,000 mark.
The falls came as traders were left underwhelmed by a communique rushed out in the early hours of Friday morning by G20 finance ministers at the IMF meeting in Washington. In the wake of Thursday's global stock market rout, the G20 committed "to take all necessary actions to preserve the stability of banking systems and financial markets" but was criticised for failing to introduce concrete measures.
Speaking at the IMF meeting on Friday, UK Chancellor George Osborne ratcheted up the pressure on European leaders to solve the crisis by calling on them to bolster the European bail-out fund and declaring they have just six weeks to find solutions. "Patience is running out in the international community... More needs to be done to avoid a disorderly outcome," he said, before referring to the next G20 meeting in Cannes on November 3 and 4. "The eurozone has six weeks to resolve its political crisis."
The comments came amid speculation that eurozone policymakers were considering boosting the size of the region's bail-out fund, the European Financial Stability Facility (EFSF), and rumours that France could step into help its banking system. The G20 communique had earlier called on the eurozone to "increase the flexibility of the EFSF, to maximise its impact".
The FTSE 100's move higher was mirrored across Europe, with the Dax in Frankfurt up 0.63pc and France's CAC 1.02pc higher. In the US the Dow Jones was little changed at 10,727.00. Any optimism came towards the end of another difficult day in which concerns were heightened after the European Commission denied a report that it was considering recapitalising the region's banking system. "There is no big European plan to recapitalise banks," said Olivier Bailly, an EC spokesman, pointing out that eurozone banks have already received €420bn (£367bn) in capital since 2008.
The comments came as Evangelos Venizelos, Greece's finance minister, was forced to issue a statement after newspaper reports claimed he had said an orderly default was one of three options open to the country. "Greece has taken the final decision to do everything in its power in order for all the European Council decisions... to be implemented fully," he said. "All other discussions, rumours, comments and scenarios... do not offer good service."
In a further blow for markets, Royal Bank of Scotland analysts issued a report in which they forecast that Europe would move into recession early next year. Investors continued to liquidate positions in commodities from metals to oil, moving to safe haven government bonds. The yield on German bunds fell to a new record of 1.64pc, with US Treasuries also setting a new low of 1.7pc.
Warning of a stock market rout unless a eurozone rescue package is found
by Phillip Inman and Larry Elliott - Guardian
Obama urges France and Germany to move quickly to find a solution to the eurozone crisis, while UK chancellor George Osborne claims Britain is 'ahead of the curve'
EU leaders were under renewed pressure today to agree immediate steps towards a full-scale rescue of ailing eurozone economies or risk a stock market rout when exchanges open on Monday. Fears that months of debate over how to resolve the Greek debt crisis had brought the world economy to another "Lehman's moment" led several prominent analysts to warn that the situation could spark a run on bank stocks next week.
President Obama and the US treasury secretary, Tim Geithner, welcomed a commitment by the European Central Bank to step up its efforts to boost growth, which could mean a cut in interest rates at its next meeting in October, but pressed France and Germany to move quickly with a rescue package to prevent further turmoil.
George Osborne warned that the leaders of the eurozone had six weeks to end their political wrangling and resolve the continent's crippling debt crisis. Eric Wand, a gilts strategist at Lloyds Corporate Markets, said: "If we come in on Monday with nothing on the table, then we'll be back to the races." Wand warned that loans from the ECB would be more sticking plaster and unlikely to satisfy investors. "[They] are hoping for a co-ordinated policy response. If we get that, then risk assets could rally, but for how long? More liquidity doesn't really cut the mustard," he said.
Stocks rallied today after G20 leaders said they would do all in their power to prevent another crash. The FTSE rebounded after the assurance to finish the day up 25 points at 5066 while the German Dax and French CAC both ended the day marginally higher.
But a week of speculation that several eurozone banks could be wrecked by defaults in the peripheral countries without further ECB support and large capital injections has helped knock $3.4tn (£2.2tn) off global stock values since Monday. The FTSE had its second worst week this year and French and German exchanges remain at two-thirds of their value in July. Commodities fell to a nine-month low as silver, copper and nickel tumbled. The Standard & Poor's GSCI Index of 24 commodities fell as much as 2.2%, leaving it 7.8% lower than at the start of the week.
Speaking in Washington, Osborne said that the turmoil in the world's financial markets meant there was now "a far greater sense of urgency" and mounting pressure on Europe from the G20 group of developed and developing nations. "There is a sense from across the leading lights of the eurozone that time is running out. There is a clear deadline at the Cannes (G20) summit in six weeks time," the chancellor said. "The eurozone has six weeks to resolve this political crisis." He added that "bad politics" were leading to "bad economics" in the eurozone. "We need political solutions that can help resolve the economic problems."
Osborne said the package of measures agreed in July to provide financial support for troubled members of the single currency needed to be implemented, as well as ensuring banks had enough capital to withstand market pressures. "I wouldn't say all the pieces of the jigsaw are in place," Osborne said, adding that the members of the eurozone had to supplement monetary union with closer fiscal ties.
While the government had no intention of joining monetary union, the chancellor said it was in Britain's interests for the eurozone to work. "The break-up of Europe would be bad for Britain." The chancellor said Europe needed to show that it had enough firepower to convince the markets it was getting ahead of the curve, and made it clear that the €440bn European Financial Stability Facility needed to be beefed up. "I am not sure it is adequate," Osborne said.
He refused to speculate on whether Greece would be forced to default on its debts, but said the government had contingency plans in the event that the worst-affected eurozone country did capitulate. "I have made it a priority for the Financial Services Authority and the Bank of England to make sure that the UK banking system is adequately capitalised and have sufficient liquidity to deal with all eventualities. We have stress-tested sovereign writedowns."
Osborne admitted that the darkening international economic outlook would have repercussions for the UK but insisted that he had no intention of amending his tough deficit reduction plans. It was up to the Bank of England, he added, to support demand over the coming months. "A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active."
His comments come amid signs from Threadneedle Street that it would restart its quantitative easing programme over the coming months. The Bank pumped £200bn of electronically created money into the economy between early 2009 and early 2010 in an attempt to lift the economy out of recession.
Asked how bad the situation in the UK would have to get before he would consider changing course, Osborne said: "The UK is taking appropriate action. It is very clear what has got to happen. We are sticking to the plan. These discussions in Washington are about the eurozone and the challenges there, not about market pressures on the UK. We have got ahead of the curve and have credibility."
The chancellor said the heavily indebted state of Britain meant that he could not simply "pull a lever" to boost demand. "This was a different sort of recession and it is a different sort of recovery," he said.He added that there was a certain amount of flexibility built into his budget plans because weaker growth would allow the automatic stabilisers – a bigger budget deficit caused by higher benefit payments and lower tax receipts – to kick in.
The government would announce supply-side reforms of the economy to remove obstacles to growth over the coming months, Osborne said.
Global Stocks Drop 20% Into Bear Market as Debt Crisis Outweighs Profits
by Lynn Thomasson and Michael Patterson - Bloomberg
Stocks fell, pushing the MSCI All- Country World Index of 45 nations into a bear market for the first time in more than two years, after the worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from equities since May.
The MSCI index, which slipped 0.3 percent as of 1:33 p.m. in Hong Kong today, has lost more than 20 percent since peaking on May 2, meeting the common definition of a bear market. It tumbled 4.5 percent to a 13-month low of 277.38 yesterday. The MSCI World (MXWO) Index of shares in developed nations also fell into a bear market yesterday, plunging 4.2 percent. The MSCI Emerging Markets Index reached the 20 percent threshold on Sept. 13.
The world is poised for a financial crisis, Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., said in Washington yesterday. Finance chiefs from the Group of 20 nations pledged late yesterday to address “heightened downside risks” to the global economy, echoing language used by the Federal Reserve on Sept. 21 when it announced a $400 billion plan to spur growth as the recovery from the worst contraction since the Great Depression falters.
“The market is pricing in a recession,” said Ng Soo Nam, the Singapore-based chief investment officer at Nikko Asset Management Co., which oversees about $154 billion. “Stocks are looking cheap, but it will take a lot of courage to believe that. Things could get worse. The risk of a sovereign-debt default in Greece is the most significant concern.”
The MSCI All-Country World Index has retreated 19.8 percent since July 22. It fell after Standard & Poor’s cut the U.S. credit rating following a debate over raising the nation’s borrowing limit, speculation Greece will default intensified, and Chinese inflation accelerated to a three-year high. The slump pushed the price-earnings ratio for the index down to 11.4, the lowest since March 2009 and 46 percent less than the 16-year average, data compiled by Bloomberg show.
The Standard & Poor’s 500 Index extended its drop since its peak on April 29 to 17 percent. The gauge has retreated even as analysts raise projections for 2011 profit to a record $99.34 a share this year from $98.73 on April 29, according to the average analyst estimate in a Bloomberg survey.
Benchmark measures for five out of 24 developed markets haven’t posted a 20 percent slump from their highs: the U.S., U.K., Canada, Singapore and New Zealand, according to data compiled by Bloomberg. Eight out of 21 developing nations aren’t in bear markets, including South Africa. The MSCI Emerging Markets Index has retreated 27 percent since its 2011 high on May 2.
The 15 national stock gauges with the biggest losses since the MSCI All-Country World peaked on May 2 are for European countries. Greece’s ASE Index has lost 42 percent, Italy’s FTSE MIB Index has plunged 40 percent and Hungary’s Budapest Stock Exchange Index has retreated 38 percent.
Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a previously unplanned statement in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.
The Euro Stoxx 50 Index has tumbled 28 percent since July 22 as Greece edged closer to defaulting on its sovereign debt and the cost of insuring western European countries’ loans rose to records. The MSCI Asia Pacific Index has fallen 19.7 percent since its 2011 high on May 2. China’s Shanghai Composite Index has tumbled 23 percent since its peak in November, and Japan’s Topix has slumped 25 percent since April 2010.
“Europe is going to continue to unwind and eventually end up badly for the global economy,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a telephone interview. “There are so many questions, so many uncertainties.”
The 20 percent decline in global equities ended the bull market that began in March 2009. The MSCI All-Country World Index climbed as much as 107 percent during the rally. The measure avoided a bear market in 2010, when it fell 16 percent between April 15 and July 5. The index rebounded after Federal Reserve Chairman Ben S. Bernanke foreshadowed $600 billion in bond purchases meant to prevent deflation and stimulate growth at an Aug. 27, 2010, meeting in Jackson Hole, Wyoming.
Financial stocks, which posted the biggest losses in the last bear market, are leading declines again amid growing concern that European banks will have to write down their holdings of government debt. Banks, brokerages and insurers in the MSCI All-Country World have collectively lost 31 percent since May 2.
Societe Generale SA of Paris has retreated 66 percent since May 2, the second-biggest loss among financial stocks in the MSCI All-Country behind Athens-based EFG Eurobank Ergasias. UniCredit SpA, based in Milan, has retreated 62 percent. Banks in Europe hold 98.2 billion euros ($132 billion) of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data.
Financial companies in the worldwide index sank 77 percent during the last bear market as government bailouts rescued the biggest U.S. banks from collapse and Lehman Brothers Holdings Inc., once the nation’s fourth-biggest securities firm, filed the nation’s largest bankruptcy in September 2008.
More than $37 trillion was erased from global equity values in the previous bear market that lasted for 16 months after the MSCI All-Country World peaked on Oct. 31, 2007. The index fell as much as 60 percent amid the first global recession since World War II and more than $2 trillion in losses and writedowns at financial companies worldwide after housing prices dropped.
“We could be on the eve of the next financial crisis,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said during a Bloomberg Television interview with Matt Miller and Carol Massar yesterday. The firm has $1.4 billion in assets. “We shouldn’t be because there are things that could be done to avert it, but they haven’t been done. There’s no signs that the authorities are going to do them.”
David Cameron: global economy is close to 'staring down the barrel'
by Nicholas Watt and Heather Stewart - Guardian
Cameron speech says failure of eurozone leaders to stabilise single currency is taking world economy to brink
The global economy is close to "staring down the barrel" and is threatened by the failure of eurozone leaders to agree a lasting settlement to stabilise the single currency, David Cameron warned on Thursday night.
As markets tumbled around the world, amid gloomy assessments from the IMF and the World Bank, the prime minister issued his gravest warning about the global economic outlook and bluntly told eurozone leaders to stop "kicking the can down the road". "We are not quite staring down the barrel but the pattern is clear," the prime minister told the Canadian parliament in Ottawa.
"The recovery out of the recession for the advanced economies will be difficult. Growth in Europe has stalled, growth in America has stalled. The effect of the Japanese earthquake, high oil and fuel prices is creating a drag on growth. But fundamentally we are still facing the aftermath of the world financial bust and economic collapse in 2008."
Cameron's speech came as Christine Lagarde, the managing director of the International Monetary Fund, warned world leaders that "time is of the essence" as investors took fright at politicians' failure to tackle sickly global growth and the spiralling eurozone debt crisis.
As Cameron spoke, the FTSE 100 index tumbled 246 points, or 4.67%, to close at 5041 – the blue-chip index's worst daily fall in percentage terms since March 2009. On Wall Street, the Dow Jones index closed 3.5% down at 10773 points, while share prices in France and Germany also dropped sharply.
The prime minister identified one of the main problems as the failure of eurozone leaders to agree a "lasting solution" to stabilise the single currency. "The problems in the eurozone are now so big that they have begun to threaten the stability of the world economy," Cameron said. "Eurozone countries must act swiftly to resolve the crisis. They must implement what they have agreed and they must demonstrate they have the political will to do what is necessary to ensure the stability of the system. One way or another, they have to find a fundamental and lasting solution to the heart of the problem – the high level of indebtedness in many euro countries."
In an interview with Channel 4 News, the prime minister used blunter language to call for eurozone leaders to offer stronger political backing for the €440bn (£386bn) bailout mechanism, known as the European Financial Stability Facility. In a message to the 17 eurozone leaders, he said: "We cannot go on kicking the can down the road. We need decisive action, swift action to deal with this issue."
The prime minister showed how Britain is beginning to distance itself from its EU partners by signing a letter with five other world leaders outside Europe calling on eurozone leaders to "act swiftly". The letter to the French president, Nicolas Sarkozy, in his capacity as president of the G20, says: "We have not yet mastered the challenges of the crisis."
The letter, designed to help shape the agenda at the next G20 meeting in Cannes in November, is likely to be seen as a major departure in British diplomacy, which has been anchored in the EU for the past four decades. It is unprecedented for a British prime minister to join forces with two other Commonwealth leaders – Canada's Stephen Harper and Australia's Julia Gillard – and three other leaders from outside the EU to issue a warning to the main EU member states.
The prime minister's language shows Britain's deep frustration with the failure of eurozone leaders to grapple with the crisis in the single currency. Cameron wants action in two areas: greater political will behind the eurozone bailout mechanism, and moves towards greater fiscal integration in the eurozone, though not in the rest of the EU, in the medium to long term. "The remorseless logic of economic and monetary union is fiscal integration," a British source said.
In his Ottawa speech the prime minister also echoed the IMF's calls for Europe's banks to be strengthened and added that euro countries should reform their labour markets. "Whatever course they take, Europe's banks need to be made strong enough so that they can help support the recovery, not put it at risk," Cameron said. "At the same time, we cannot put off the fundamental problem of the lack of competitiveness in many euro-area countries.
"Endlessly putting off what has to be done doesn't help, in fact it makes the problem worse, lengthening the shadow of uncertainty that looms over the world economy."
The letter to Sarkozy was initially interpreted as a warning to Barack Obama, who recently outlined a $440bn (£287bn) jobs package for the US. British officials rejected this interpretation because the Obama plan is fiscally neutral and because the letter was carefully balanced. The latest sell-off in the world's financial markets came after a key manufacturing survey in China suggested its economy is faltering, and the Federal Reserve's latest emergency measure, Operation Twist, failed to calm markets.
G20 finance ministers will discuss the darkening economic outlook on Friday in Washington on the fringes of the IMF's annual meeting. Lagarde told reporters in Washington that "our actions, our analysis and our proposed policy mix is not dictated by the day-to-day variations of the Dow Jones, the Nasdaq, the Cac or the Dax".
But she called on Europe and the US to rediscover the spirit of the London G20 conference at the depths of the financial crisis in 2009, when leaders promised to boost the IMF's resources, bail out banks and avoid tit-for-tat protectionism.
Lagarde said the priority must be "implementation, implementation, implementation", but she conceded that politicians now had less scope for action than three years ago in the wake of the collapse of Lehman Brothers. "In 2008, there was a much wider path for recovery, because the sovereigns had more room for manoeuvre. They incredibly ably managed to avoid protectionism, to kick-start growth, and to make sure than the financial pipes that fuel the economy worked again."
In Greece the government announced a fresh round of austerity measures on Tuesday, including pension cuts and tax rises for low earners, in an attempt to persuade its creditors, including the IMF, to release the latest €8bn tranche of rescue funds. But many investors now believe default for the debt-burdened state is inevitable.
The Federal Reserve chairman, Ben Bernanke, had hoped to soothe investors' fears on Wednesday by announcing Operation Twist, aimed at driving down long-term interest rates and boosting the ailing American housing market. But share prices around the world plunged after the announcement as investors became fixated instead on the Fed's warning that the economy faced "significant downside risks".
Greece Sees 50% Debt Write-Off in Orderly Default, Ta Nea Says
by Maria Petrakis - Bloomberg
Greek Finance Minister Evangelos Venizelos told members of the ruling party that he sees three possible outcomes to the debt crisis, including one that involves an orderly default with a 50 percent loss for bondholders, Ta Nea said, without citing anyone.
Venizelos outlined "good, bad and better" scenarios to lawmakers with the "good option" involving the implementation of the July 21 accord for a second financing package, which projects a 20 percent loss for bondholders, the Athens-based newspaper said.
The "bad" scenario is a collapse of the accord and a disorderly default, Ta Nea said. The "better" one involves an orderly default in the euro area with Venizelos indicating a 50 percent haircut for investors, the newspaper said. That outcome isn’t something Greece can request and requires the agreement and coordination of many actors, Ta Nea said.
Morgan Stanley's Exposure To French Banks Is 60% Greater Than Its Market Cap... And More Than Half Its Book Value
by Tyler Durden - Zero Hedge
With French banks now a daily highlight in the market's search for the next source of contagion, and big, multi-syllable words such as conservatorship and nationalization being thrown about with increasingly reckless abandon, perhaps it is time to consider the downstream effects of a French bank blow up.
And we are not talking French sovereign troubles, which are about to get far worse with the country's CDS once again at record highs means the country's AAA rating is as good as gone. No: banks, as in those entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USD currency.
Which in turn brings us to...Morgan Stanley, the little bank that everyone continues to ignore for assumptions of a pristine balance sheet and no mortgage exposure. Well, hopefully we can debunk one of these assumptions by presenting the bank's Cross-Border Outstandings, which "include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash trading instruments but exclude derivative instruments and commitments.
Securities purchased under agreements to resell and Securities borrowed are presented based on the domicile of the counterparty, without reduction for related securities collateral held." We'll leave it up to readers to find the relevant number.
The one thing we will highlight is that $39 billion is about 60% more than the bank's market cap and a whopping 65% (as in more than half) of its entire book (less non-controlling interests) equity value.
So if you are looking for a French bank implosion derivative play, look no more.
And naturally, it goes without saying, that adding across MS' entire European bank exposure is 3 times its market cap, and well over its entire book equity value.
Dutch central bank president says Greek default is 'one of the scenarios'
The president of the Dutch central bank said in a newspaper interview published Friday that he no longer rules out the possibility that Greece may not be able to pay back its crippling government debt. A Greek default "is one of the scenarios," Klaas Knot said in an interview published in respected Dutch newspaper Het Financieel Dagblad.
"I won't say that Greece cannot default," said Knot, who is the recently installed president of De Nederlandsche Bank and a member of the governing council of the European Central Bank. Knot's comments are unusual because they come from a member of the European Central Bank's 23-member governing council. The bank has insisted Greece must stick with its bailout plan and has opposed default as a solution.
"I have long been convinced that a default is not necessary," Knot said. "But the news from Athens is sometimes not encouraging. All efforts are aimed at preventing this, but I am now less positive in ruling out a default than I was a few months ago."
Many economists say that Greece's debt burden is unsustainable and that bond markets have sent the prices of Greek bonds so low that they reflect a likely default. A Greek default could send shockwaves through the eurozone banking system and the global economy. European officials have tried to prevent one because it could mean losses for banks that hold Greek government bonds and prompt speculation that other governments with shaky governments could face increasingly acute funding pressures.
Greek bondholders have already agreed to take a 21 percent loss on the value of their investments in a swap for new bonds. That loss is relatively mild by the standard of government defaults, which often inflict losses of 50 percent or more. Many economists say the current swap arrangement does not give Greece enough debt relief.
Moody's downgrades 8 Greek banks
by Elena Becatoros - AP
Moody's ratings agency downgraded eight Greek banks by two notches Friday due to their exposure to Greek government bonds and the deteriorating economic situation in the debt-ridden country, whose government has struggled to meet the terms of an international bailout.
Moody's Investors Service downgraded National Bank of Greece, EFG Eurobank Ergasias, Alpha Bank, Piraeus Bank, Agricultural Bank of Greece and Attica Bank to CAA2 from B3. It also downgraded Emporiki Bank of Greece and General Bank of Greece to B3 from B1. The agency said the outlook for all the banks' long-term deposit and debt ratings was negative.
Moody's cited "the expected impact of the deteriorating domestic economic environment on non-performing loans" and "declines in deposit bases and still fragile liquidity positions" in its reasoning for the downgrade.
Greece has angered its international creditors by lagging behind in its commitments to implementing reforms and carrying out pledges it has made to secure funds from its euro110 billion ($149 billion) bailout from other eurozone countries and the International Monetary Fund.
In a rush to secure the disbursement of the vital next batch of loans, worth euro8 billion, and heading toward a fourth year of recession, the government this week announced another round of tax hikes and pension cuts, angering an already austerity-weary public which has responded with strikes.
Public transport workers and taxi drivers are expected to hold a 48-hour strike next week that will leave Athens without any form of public transport, while air traffic controllers have declared a 24-hour strike this Sunday. A nationwide general strike is set for Oct. 19.
Debt inspectors from the IMF, European Central Bank and European Commission, collectively known as the troika, are due back in Athens next week to complete their review of Greece's progress and make a recommendation on whether it should receive the next loan installment. Without it, Greece will run out of cash in mid-October.
Moody's said that despite its downgrade, it "recognized the continued potential for the Troika to extend systemic support to the Greek banks in case of need," as well as the potential of a Greek financial stability fund to do the same. This "results in a one notch of uplift in the senior debt and deposit ratings of the domestically owned banks from their standalone credit strength," the agency said.
After more than a year and a half of repeated rounds of austerity measures that have included salary and pension cuts in the public sector and waves of tax hikes, Greece has found itself in the grips of a major recession, with its chances of returning to growth next year all but out of reach. The government insists it hopes to post a primary surplus -- spending less than it earns before taking interest rates on outstanding debt into account -- next year.
Moody's pointed out that the country's economy contracted by 7.3 percent year-on-year in the second quarter of this year, while unemployment has risen to more than 16 percent. This, it said, also affected the potential benefits of the announced merger of Greece's second and third largest lenders, EFG Eurobank Ergasias and Alpha Bank.
While the merger "has some potential positive elements for the credit standing of the future joint entity ... Moody's believes that these are offset by the currently fragile operating environment," the agency said. "From a credit perspective, the near term risks in the form of possible systemic shocks outweigh the potential future benefits emanating from this merger."
Greeks strike amid pain and anger over austerity
by Lefteris Papadimas and Tatiana Fragou - Reuters
Greek workers staged a 24-hour strike on Thursday forcing the transport system to a standstill in protest against the government's intensified austerity drive to secure aid to save the debt-laden country from bankruptcy.
Striking taxi drivers and bus, metro and rail workers meant commuters had to use their own cars, triggering kilometers-long traffic jams and stranding tourists at hotels in Athens' ancient city center for several hours. Unions said more strikes were planned.
About 1,000 members of Communist group MAS marched to parliament chanting "Resist" and "Plutocracy should pay for this crisis" as part of the first big nationwide rallies since June when daily protests ended in bloody clashes with police. Another 6,000 students, some with black flags, and teachers joined them outside parliament. There was a big riot police deployment and the rallies dispersed peacefully.
In his first public comments on yet more austerity moves, Greek Prime Minister George Papandreou said they were vital. "There is no other path. The other path is bankruptcy, which would have heavy consequences for every household," he said after a meeting in parliament with deputies from his ruling Socialist party.
After a "troika" including EU and IMF inspectors made clear they were losing patience with the government's failure to meet the targets of a bailout and threatened to withhold aid, the cabinet agreed on Wednesday to front-load austerity measures in a strategy expected to win them more time and money. "For the troika at the moment it's enough and the measures will be approved by parliament. The troika will release the next tranche," Christoph Weil, a senior economist at Commerzbank, told Reuters.
"We Have No Hope"
Greece must now confront the trickier issue of how to collect extra taxes and implement the painful measures although commentators said the fiery opposition of the past amongst some protesters had given way to weary resignation. Policymakers and economists fear a Greek default on its 340-billion-euro debt could set global markets tumbling and push other vulnerable euro zone members like Italy and Spain over the edge, risking plunging the West back into recession.
As well as cutting pensions and extending a real estate tax rise, the cabinet said it would put 30,000 civil servants in "labor reserve" this year, cutting their pay to 60 percent and giving them 12 months to find new work in the state sector or lose their jobs. "This is a policy we do not tolerate, we do not want. We are in continuous, total, permanent opposition to it," said Yannis Panagopoulos, president of private sector employees union GSEE, speaking on state NET TV.
With the economy expected to contract by at least 5 percent this year, after a 4.4 percent slump in 2010, and unemployment at 16 percent and rising, most Greeks hold little hope austerity measures will help the nation emerge from crisis.
"We are living in terror that we may lose our jobs, our lives. Even if these lay-offs are necessary, we are not being treated like humans," said Costas Andrianopoulos, 32, who works at the National theater. "They cut our wages and our pensions and we took it. But I don't believe any more that any of this is for the good of the country. We'll be sacrificed for nothing. We can't avoid default, We have no hope."
The conservative opposition, which has a slim lead over Papandreou's Socialists in opinion polls and has called for snap elections, maintained its refusal to cooperate with the government, which has irked EU leaders.
Troika To Athens Next Week
"The euro zone's leading nations are nervous and are taking it out on us," Finance Minister Evangelos Venizelos said on Thursday, pursuing a familiar line that Greece is being made into a scapegoat for wider problems. "We must fully honor our obligations so that no pretexts can be used (against us)."
The country remains bitterly divided between private sector workers who say a bloated state bureaucracy is strangling Greeks and public servants who say the biggest problems are political corruption and tax evasion. The new measures followed warnings from the EU and IMF inspectors that Greece must stop missing the targets of its five-year bailout plan or miss the 8-billion-euro ($11 billion) aid tranche it needs to pay salaries next month.
After more than a year of Greece consistently falling behind on its commitments, the head of an EU taskforce helping Athens said on Thursday he now saw a greater willingness by Greek officials to put the reforms in place. But troika officials, wary of Greek government inertia, will be closely scrutinizing the latest proposals to see if they are sufficient to plug fiscal gaps and can be implemented swiftly, ahead of meetings between Venizelos and finance ministers and senior IMF officials in Washington this week.
Government officials expected the measures to be passed by parliament in the next two to three weeks after they have been discussed with the troika team which is expected to return to Athens early next week to complete their review.
Greece's Middle Class Revolt against Austerity
by Ferry Batzoglou and Jörg Diehl - Spiegel
Small business owners in Greece have long been the backbone of the economy and reliable taxpayers in a country where tax evasion is rampant. That, though, is now changing. Self-employed workers like Angelos Belitsakos have had enough of rising taxes and have begun to revolt.
The people who could ultimately give Greece the coup de grace are not the kind to throw stones or Molotov cocktails, and they have yet to torch any cars. Instead, they are people like 60-year-old beverage distributor Angelos Belitsakos, people who might soon turn into a real problem for the economically unstable country. Feeling cornered, he and other private business owners want to go on the offensive. But instead fighting with weapons, they are using something much more dangerous. They are fighting with money.
Belitsakos is a short, slim and alert man who lives in the middle-class Athenian suburb of Holargos. He is also the physical and spiritual leader of a movement of businesspeople in Greece that is recruiting new members with growing speed. While Greece's government is desperately trying to combat its ballooning budget deficit by raising taxes and imposing new fees, people like Belitsakos are putting their faith in passive resistance.
The group's slogan is as simple as it is stoic: "We Won't Pay."
Working 12-Hour Days, Seven Days a Week
This business owners' absolute refusal to pay any taxes resembles an uprising of the ownership class, rather than the working class, a rebellion of the self-employed business owners who have long been the backbone of Greek society. These are not the people who weaseled their way into Greece's oversized civil service; these are people who put their money in the private sector, working 12-hour days, seven days a week. Or so Belitsakos says.
Standing in his small store, Belitsakos makes a sweeping gesture and says that the people in his movement no longer have a choice. "The state will kill us," he says. "We're acting in self-defense." Then he starts to do the math. Over the last two years, his sales have massively shrunk as 60 of the tavernas and restaurants he used to make deliveries to have terminated their contracts with him. At the same time, the government has raised the value-added tax (VAT) twice while imposing a never-ending series of new fees. He mentions the €300 ($406) one-time fee for the self-employed, a two-percentage-point boost in the VAT, a €180 solidarity levy for the unemployed and a property tax that is "easily a few hundred euros every year."
The taxes are part of Athens' last ditch effort to avoid drifting into insolvency and to live up to the promises of austerity it delivered to the European Union. The country's vast debt means it is already reliant on the steady drip of aid it receives from a €110 billion rescue package passed last year, with a second such package likely to be passed this fall. But each payment from the fund is dependent on progress being made on the effort to clean up the country's finances.
That progress has been halting at best. In an effort to move the process forward, the government of Prime Minister Giorgios Papandreou has recently announced it intends to cut thousands of more civil servant jobs. And it introduced a controversial one-off property tax which has angered many. Several other taxes and fees have also been introduced.
Belitsakos calls them "charatzi," a word from Ottoman times that can perhaps best be translated as "loot" or "compulsory levy." The term is meant to indicate taxes levied arbitrarily and without justification, such as the tithe once paid to feudal lords. "But I can't and won't pony up. It's wrong," Belitsakos says. "Don't you understand?"
A Common Type of Revolt
The situation finally drove Belitsakos to write a letter to the head of the local tax authority in the name of his group. "We see ourselves facing a whole series of new taxes," he wrote. "We are protesting and enraged." He went on to charge that the only purpose behind the new fees was the "dispossession and impoverishment" of the Greeks and that he was now forced to resist. Briefly put, he wrote: "We won't pay."
Belitsakos says the tax official he handed the letter to was understanding and friendly. The fact that the civil servant put on a brave face might have something to do with all the TV cameras that were present. But, in a place like Greece, it is also entirely possible that the official was simply not all that surprised that someone would announce they were evading their taxes.
As well-known analyst Babis Papadimitriou puts it, the average Greek may well love his country, but he views the state apparatus as a power that one can and should plunder. Papadimitriou says that while the European average for VAT taxes that are evaded is 10 percent, the rate in Greece is roughly 30 percent. About a third of the entire economy happens off tax-authority radars.
You Can't Lose If You Don't Play
These days, even communists, unionists and leftists are raising a public outcry against the new taxes. This week, Aleka Papariga, the general secretary of the Communist Party of Greece, said that the only way to stop the complete bankrupting of the people was for them to not pay the "charatzi." In fact, financial resistance had now become the supreme civic duty, she said.
In an interview with SPIEGEL ONLINE, Greek Economy Minister Michalis Chrysochoidis said: "The question is how we can create a feeling of solidarity. One for all and all for one, that's what it's about now." Still, Chrysochoidis would not answer his own question. For the moment, he said, it doesn't look like the government can count on many of their fellow Greeks being willing to sacrifice themselves for the interest of the state. In fact, people are abandoning the government in droves.
Belitsakos, the beverage distributor, can't and won't play a role in rescuing his country no matter what. The reason has nothing to do with patriotism. Instead, it has to do with his mistrust of the government in Athens and "international financial capitalism" and the fact that, despite having once studied mathematics, he still can't fathom the amount of money at stake here.
Belitsakos stresses that his plan is to refuse to pay any and all taxes and fees. If he has to, he says he will either go broke, to jail or both. He is convinced that there are thousands upon thousands who think just like he does and that, in the end, the Greeks will win this battle that they never chose.
The only question is what they really have to win.
No need to nationalise Greek banks - EU task force
by Annika Breidthardt - Reuters
Greek banks do not need to be nationalised but should receive direct support from the currency bloc's bailout fund, the head of a new EU task force set up to help rebuild the Greek economy was quoted on Friday as saying. "The banks did rock solid business until the start of the debt crisis. Therefore I see no reason for nationalisation," Horst Reichenbach told the Handelsblatt newspaper.
"It would be desirable to support the banks themselves, such as with means from the euro rescue fund (European Financial Stability Facility) EFSF or with loans from the European Investment Bank."
Reichenbach heads a 25-member team that will draft quarterly reports on the country's reform progress. It will work separately from the EU, IMF and ECB inspectors known as the troika who decide whether Athens qualifies for its quarterly bailout instalments. Reichenbach also said 70 percent of 20 billion euros of structural funds had so far not been touched and could be used to support Greek infrastructure and industry, filling a gap left by private investors who had pulled out of projects.
Reichenbach identified tourism, agriculture and renewable energy as sectors which could earn Athens money. Greek-German talks on solar energy had advanced but the industry would still need to be subsidised currently, Reichenbach said.
Asked whether German electricity consumers should support Greece's solar investments, he said: "That's exactly what German and Greek authorities are currently working on," adding that that would make necessary a change to Germany's renewable energy law and that Greece could hopefully start solar energy production next year.
EU to speed recapitalisation of 16 smaller banks
by Brooke Masters, Peggy Hollinger and Alex Barker - FT
European officials look set to speed up plans to recapitalise the 16 banks that came close to failing last summer’s pan-EU stress tests as part of a co-ordinated effort to reassure the markets about the strength of the 27-nation bloc’s banking sector.
A senior French official said the 16 banks regarded to be close to the threshold would now have to seek new funds immediately. Although there has been widespread speculation that French banks are seeking more capital, none is on the list. Other European officials said discussions were still under way.
The move would affect mostly mid-tier banks. Seven are Spanish, two are from Germany, Greece and Portugal, and one each from Italy, Cyprus and Slovenia. The list includes Germany’s HSH Nordbank and Banco Popolare of Italy.
When the European Banking Authority, the new pan-EU supervisor, tested 91 banks against a stressed economic scenario – including rating downgrades of sovereign debt – nine banks failed and were told to raise more capital by the end of December.
The 16 institutions that are now the focus of attention ended up with core tier one capital ratios – the key measure of financial strength – of 5 and 6 per cent. The pass mark was 5 per cent. The EBA had given those banks until April 2012 to implement plans to shore up their capital buffers.
While the banks are expected to turn to private markets first, officials said that state aid may be required. The French government appears to favour using the new €440 billion rescue fund, known as the European financial stability fund, but other member states are likely to argue for national action.
Joaquín Almunia, the EU competition commissioner, last week extended the special regime for state aid to banks that was set up in the 2008 crisis to allow governments to pump soft loans and guarantees into failing banks.
The EU internal markets commissioner, Michel Barnier, said the 16 banks that nearly failed the stress tests "are judged to be fragile and must also be strengthened further. We want the recapitalisation for these banks to be by private means. The era of bailing out banks must end. But I cannot of course exclude the possibility that some of the above banks will require state aid."
An EBA spokeswoman said "The EBA is working with [national supervisors] to ensure a co-ordinated approach in identifying and addressing such capital needs ... [and] will be reviewing the actions undertaken by those banks.f
Banks that did better in the stress tests but are not yet in compliance with the tough new capital requirements agreed last winter by global regulators will be expected to accelerate their "march towards the Basel III ratios", the French official said. The Basel III agreement gives banks until 2019 to be fully compliant.
The other 14 banks on the list are: Espirito Santo and Banco Português of Portugal; Piraeus Bank and Hellenic Postbank of Greece; Banco Popular Espanol, Bankinter, Caixa Galicia, BFA-Bankia, Banco Cívica, Caixa Ontinyent, Banco De Sabadell of Spain; Nova Ljubljanska Banka of Slovenia; Cyprus’s Marfin Popular Bank and Norddeutsche Landesbank of Germany.
On Friday, rating agency Moody’s Investors Service downgraded the rating of Piraeus Bank along with five other Greek banks including National Bank of Greece and Alpha Bank by two notches from B3 to Caa2. It also cut the ratings of two other Greek lenders from B1 to B3. Moody’s cited Greece’s struggling economy and declining deposits as among the reasons for the move.
Fear gauge enters the red zone
by Ambrose Evans-Pritchard - Telegraph
Europe's debt crisis risks escalating out of control as the world economy slides towards a double-dip slump with few shock absorbers left to limit the damage.
Key indicators of credit stress have reached the danger levels seen before the Lehman Brothers failure three years ago, with Markit's iTraxx Crossover index – or "fear gauge" – of corporate bonds surging 56 basis points to 857 on Thursday. Societe Generale led a further rout of bank shares, crashing 9pc in Paris on concern that it might need recapitalisation to cope with losses on Italian and Spanish debt.
The yield spread between Italian 10-year bonds and Bunds reached a fresh record of 408 basis points before the European Central Bank (ECB) intervened in late trading. It is near the level at which LCH.Clearnet raises margin requirements, the trigger that forced Greece, Portugal and Ireland to request bail-outs.
Global investors appear shaken by the refusal of the US Federal Reserve to come to the rescue yet again with quantitative easing (QE3) even though it was never likely the bank would launch fresh stimulus with core inflation running near 2pc or in the face of protests from Capitol Hill.
The global flight from risk has hit Europe hardest. Peter Possing Andersen from Danske Bank said Europe’s authorities are running out of time. "The financial markets have lost faith in the current policies and the economy is on the verge of a recession. Radical action is needed to short-circuit the negative spiral," he said.
"Segments of the financial markets are dysfunctional and access to credit is being shut down. European policymakers must take imminent and bold measures. Until this happens, the market will grind slowly but surely towards disaster. The current policy of austerity risks killing the already-fragile recovery and is making a bad situation worse in terms of debt dynamics," he said.
Mr Andersen said Greece needs greater debt relief to break the "vicious circle", while the ECB should step in with "unlimited" bond purchases from countries such as Italy that are essentially solvent.
Andrew Roberts, credit chief at RBS, said recent weeks’ grim economic data have rendered Europe’s "muddle through" policy unworkable, pushing weaker states towards the brink. The latest PMI data show that export orders for manufacturing tumbled to 44.8 in September, the lowest since mid-2009.
Ominously, the PMI data for China is flashing contraction warnings for the third month, dropping further than it did during the depths of the Great Contraction, suggesting the loan curbs are starting to bite. "We are in a fresh cyclical downturn within a structural slump/depression. We need global co-ordinated monetary action and the ECB must cut rates by 50 points. It made a terrible mistake by raising rates in July," Mr Roberts said.
The IMF has slashed its growth forecast for Italy to a stall speed of just 0.3pc in 2012, a level that risks havoc with debt dynamics. The country must raise €260bn by late next year. Each 100-point rise in borrowing costs increases the budget deficit by €2.5bn. The IMF warned that emerging markets are nearing the buffers of credit growth and are losing their fiscal room for manoeuvre. It said China’s domestic loans have risen to 173pc of GDP, "well above" the safety level.
The IMF fears "significant" losses on $1.7 trillion of local government debt, raising the risk Beijing may need to rescue the system. "The consequences could be a substantial worsening of China’s public debt metrics and a narrower scope for future fiscal stimulus," it said. China cannot safely respond to a second global shock by opening the floodgates of cheap credit again.
Professor Giuseppe Ragusa from Luiss Guido University in Rome said the ECB has the power to halt the eurozone’s escalating crisis by pledging to buy up €2 trillion of bonds. "They would not have to buy the debt. The promise would be enough," he said. Such bold action appears unlikely. The ECB has intervened hesitantly over the past six weeks, without the overwhelming force needed to convince markets that it will back-stop Italy’s €1.8 trillion debt – the world’s third largest.
The bank is constrained since the policy is vehemently opposed by the Bundesbank and by German president Christian Wulff, who has accused the ECB of breaching the EU treaty law. David Owen from Jefferies Fixed Income said the Bundesbank increased its balance sheet by €50bn in August alone to help shore up the Eurosystem. It has lifted its liquidity provision eightfold to €421bn since the crisis began, almost as much as the ECB itself.
On Thursday IMF managing director Christine Lagarde said the ECB must continue to provide "solid, reliable" funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis. The ECB "plays and can play and I hope will continue to play a critical role," she said.
There are clearly limits to how far this policy can be pushed without a treaty change. Otherwise it amounts to fiscal union by the back door. The task of purchasing bonds and recapitalising banks must fall to the EU’s bail-out fund, but it will not be ready until ratified by all national parliaments later this year. Europe faces a tense Autumn.
Rash of bank downgrades as IMF demands rapid action over debt
by Larry Elliott and Jill Treanor - Guardian
• Bank of America, Citigroup and Wells Fargo downgraded in US
• S&P cuts ratings on Italy's Intesa Sanpaolo and Mediobanca
• IMF warns time is running out to solve financial crisis
Banks on both sides of the Atlantic have been downgraded by ratings agencies just hours after the International Monetary Fund warned time was running out to tackle weaknesses in the global financial system.
The Washington-based IMF, which said that the exposure of European banks to debt in the weakest parts of the eurozone had ballooned to €300bn since last year, used its half-yearly global financial stability report (GFSR) to warn that there had been a substantial increase in risks to stability over the past few months. It said the sharp rise in market turmoil over the summer had been caused by investors losing patience with the inadequacy of reforms since the start of the crisis more than four years ago.
America's biggest bank, Bank of America, was downgraded two notches by the Moody's on concerns that BoA – which rescued troubled rivals such as Countrywide and Merrill Lynch during the 2008 banking crisis – might not be bailed out by the US government if it ran into difficulty.
"Moody's believes that the government is likely to continue to provide some level of support to systemically important financial institutions. However, it is also more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute," the agency said. The analysis was disputed by Bank of America, which pointed out its capital strength and holdings of liquid assets.
Moody's also downgraded Citigroup and Wells Fargo in the US, while Italian banks Intesa Sanpaolo and Mediobanca were downgraded by Standard & Poor's, which had downgraded Italian government debt for the first time in five years on Tuesday.
José Viñals, the IMF's financial counsellor, told journalists in Washington DC that risks were increasing in the financial system. "Since our previous report, financial stability risks have increased substantially – reversing some of the progress that had been made over the previous three years. So we are back in the danger zone,"
Viñals said as he cited a trio of shocks to the financial system: unequivocal signs of a broader global economic slowdown, turbulence in the euro area and the credit downgrade in the US. "This has thrown us into a crisis of confidence, which is being driven by three main factors: weak growth, weak balance sheets and weak politics," he said.
The Fund sought to quantify the financial strain put on Europe's banks by the sovereign debt crisis since 2010. "During this period, banks have had to withstand an increase in credit risk coming from high-spread euro area sovereigns that we estimate amounts to about €200bn [£175bn]. If we include exposures to other banks in high-spread euro area countries, the total estimated spillover increases to €300bn," Viñals said.
He added it was still possible to find a way through to sustained recovery. "But for this, we need to act now; we need to act boldly; and we need to act in a globally co-ordinated manner. There is a way; now we need the political will."
Financial reform needed now
The IMF said that the crisis had moved into a new, more political phase and that, in the euro area, important steps had been taken to address current problems – but political differences within economies undergoing austerity programmes and among countries providing support had impeded achievement of a lasting solution. "Meanwhile, the US is faced with growing doubts over the ability of the political process to achieve a necessary consensus regarding medium-term fiscal adjustment, which is critically important for global stability," the IMF added.
The Fund's report said an extended period of low interest rates could carry longer-term threats to the financial system, although cheap borrowing costs were still needed today given the state of the global economy: "Low rates are diverting credit creation into more opaque channels, such as the shadow banking system. These conditions increase the potential for a sharper and more powerful turn in the credit cycle, risking greater deterioration in asset quality in the event of new shocks."
The IMF said the financial reform agenda needed to be completed as soon as possible and implemented internationally in a consistent manner. This includes the finalisation of the Basel 3 agreement governing capital requirements of banks, the treatment of systemically important financial institutions, and addressing the challenges posed by the shadow banking system. "For the first time since the October 2008 GFSR, risks to global financial stability have increased, signalling a partial reversal in progress made over the past three years," it said.
"Recent market turmoil suggests that investors are losing patience with the lack of momentum on financial repair and reform. Policymakers need to accelerate actions to address long-standing financial weaknesses to ensure stability."
The report warned that four years of financial crisis had left governments saddled with onerous debt burdens and sharply higher funding needs. "Lower tax revenue, weaker growth prospects, and large-scale support for ailing financial institutions have driven public finances into precarious territory.
"The latest bout of market volatility has reminded some investors of the collapse in asset prices following the September 2008 Lehman Brothers bankruptcy. Although the current reaction has not been as severe or as widespread as it was after that event, risk perceptions are greater for European banks and sovereigns. There is a risk of a further deterioration if appropriate policies are not implemented," the report said.
A Lack of Lending at European Banks Increases the Fear of Stagnation
by Jack Ewing - New York Times
This was supposed to be the month that European banks went back to debt markets to refill their coffers. It is not working out that way.
On the contrary, debt issuance by banks has slowed to a trickle at the same time that short-term interbank lending is drying up. The financing drought raises questions about whether banks will have enough money to refinance their own long-term debt and still meet demand for loans.
Less lending could further depress growth in Europe, which is already teetering on the edge of recession. "The euro zone economy has stalled and as the recent financial stresses feed into the real economy, it is likely to get worse still," analysts at HSBC wrote in a note to clients on Thursday. A release of data showed that pessimism among manufacturers had reached levels not seen since the 2009 recession.
The fund-raising problems at banks stem directly from the sovereign debt crisis, which is having an insidious effect in a few ways. Not surprisingly, investors are wary of banks that could suffer losses if Greece defaults on its debt, as seems increasingly likely. But the crisis has also raised doubts about the underlying health of the European banking system and whether governments would be able to step in to rescue their banks if there were another financial catastrophe.
"Banks certainly do not have enough capital in relation to their government bonds," said Dorothea Schäfer, an expert in financial markets at the German Institute for Economic Research in Berlin. She has calculated that the 10 largest German banks would need to raise 127 billion euros ($171 billion) to bring their capital reserves to 5 percent of gross assets — a level she considers barely adequate.
"That could substantially heighten trust, I would even say would bring it back," Ms. Schäfer said. But raising that additional capital would be politically perilous because it would probably require another taxpayer-financed bailout. Many of the banks that need capital are already owned by government entities and, because they are not listed on stock markets, cannot sell shares to increase their capital.
The banking industry is also fighting requirements that would require them to keep more ample reserves, which would cut into profits. According to the standard used by regulators, banks are much better capitalized than they were in 2008. Banks in Europe had so-called core Tier 1 capital — the most durable form of reserves — equal to 10.6 percent of their assets at the end of June, according to calculations by analysts at Nomura. That compares with a previous low of 6.4 percent.
For that reason, some analysts say that the alarm about bank financing is overblown. "I don’t think we’re overly concerned yet," said Jon Peace, a banking analyst at Nomura. But he added, "Definitely we are watching the data week by week." He said that banks in Northern Europe, where government debt is less of a problem, were having an easier time raising money.
Ms. Schäfer said, though, that current measures of capital reserves were "useless" because they did not capture the risk from holdings of government bonds, which the International Monetary Fund this week estimated at 300 billion euros for European banks.
Regulations still treat European government debt as if it were risk-free, though it obviously is not. As a result, banks are not required to set aside extra capital to cushion against a government default. And holdings of government bonds are excluded from the calculation of capital ratios.
Sophisticated investors are aware of these shortcomings, which helps explain the drop in debt issuance recently. Since July, sales of bonds and other debt instruments have plummeted 85 percent compared with sales in the period a year earlier, according to Dealogic, a data provider in London.
"A lot of money has been lost," said Kenneth Rogoff, a Harvard professor and former chief economist at the I.M.F., during an appearance in Frankfurt on Thursday. Greek default is inevitable, said Mr. Rogoff, author of a history of sovereign defaults. "Banks and governments may not have put it in their books," he said of the losses, "but it’s gone."
Though September is not yet over, it is clear that issuance will be well below levels from earlier this year, denying banks one of their main sources of financing. Through Thursday, Dealogic recorded a meager 2.6 billion euros in debt issues. That compares with 6.2 billion euros for all of August and 65.5 billion euros in January, the most active month for bond issues this year.
The plunge in bond issues by banks is happening at the same time that European financial institutions are having trouble borrowing from one another at reasonable rates on the open market. As a result, bank borrowing from the European Central Bank — the lender of last resort for euro zone banks — surged again this week.
In another measure of banks’ suspicion of one another’s creditworthiness, a closely watched measure of interbank stress, known as the Euribor-OIS spread, rose to its highest level since March 2009, according to Bloomberg data. The cost for European banks for financing in dollars rose to near the highest level in almost three years.
It is the nature of the interbank market that just a whisper of doubt about a bank’s solvency can be enough to keep lenders away, and lead them to the central bank loan window. "Nobody really wants to lend to anybody where there is the slightest doubt," said one banker in Frankfurt involved in fixed-income markets, who spoke on the condition of anonymity to avoid offending clients. "Any counterparty where the market suspects underlying problems will have trouble finding liquidity from sources other than the E.C.B."
In what investors take as a particularly bad sign, a small number of banks have also been borrowing emergency dollars from the central bank. That raises questions about whether some large European banks are having trouble refinancing assets in the United States, a problem disturbingly reminiscent of the 2008 financial crisis.
Shares of French banks have been hit particularly hard because of perceptions that they are not prepared for potential losses on their holdings of Greek debt. Last week, the French bank BNP Paribas denied a report in The Wall Street Journal that it had run into problems obtaining dollars on the market. The central bank closely guards the identity of borrowers.
Regulations allow banks to ignore market movements in the prices of sovereign bonds, classifying the bonds as long-term holdings and pretending that governments will always pay the promised interest and principal. But those bonds may still represent a continuing liability to banks, and another source of market nervousness.
Many banks may have borrowed money in the short term to buy the bonds in the first place — for example, taking out a three-month loan to buy a bond that matures in 10 years. This is a common practice known as maturity transformation. In good times, banks can profit from the difference between short-term and long-term interest rates. But it means that banks must continually refinance the original purchase price of the bond. Without financing, or enough capital to absorb the loss, a bank can go broke.
Those bonds are worth less today in another way. Government debt is the most common asset banks use as a collateral to obtain loans in the so-called repo market, which is another crucial source of financing. But lenders have become less willing to accept European bonds except at a discount to their face value, if at all.
Use of Greek, Portuguese and Irish bonds as collateral in the repo market fell by half in the second half of 2010 compared with the amount in the period a year earlier, as markets imposed steep discounts, according to a study by Michael Davies and Tim Ng at the Bank for International Settlements in Basel, Switzerland.
Adding yet another layer of uncertainty, the debt crisis has undermined the longstanding assumption that governments will step in if their domestic banks get in trouble. Lenders have begun to wonder if countries like Italy — which already has one of the world’s highest debt burdens as a percentage of its economy — would even be able to.
In the B.I.S. study, which was published this week, Mr. Davies and Mr. Ng warned: "Sovereign credit risk and its implications now pose a significant and urgent challenge to banks."
EU says €420 billion ($568 billion) injected into Europe's banks
by Robin Emmott and Luke Baker - Reuters
European banks have already received 420 billion euros in funds to help recapitalize and are in a much better shape than three years ago, the European Commission said on Friday.
"The recapitalization of European banks is something that is ongoing, it is something that is already happening," Commission spokesman Olivier Bailly told a regular briefing. "It has been going on since 2008, it is worthwhile recalling that. The amount for recapitalization of European banks is 420 billion (euros)," he said.
Eight banks failed this summer's pan-EU banking stress tests and another 16 were considered as fragile. Investors are concerned about European banks' ability to handle a possible Greek default and the likely wider contagion.
Bailly said it was for each bank to come forward with a plan if it needed to increase its capital, and for member states to assess those and decide whether markets or governments needed to help in recapitalizing. "There is no big European plan to recapitalize banks in Europe," he told the briefing.
French banks could tip Europe back into a full-blown banking crisis
by Mohamed El-Erian - FT
Conventional wisdom may now be only half right when it comes to solving Europe’s mess. Fixing the sovereign debt problem is still necessary, but it may no longer be sufficient. Europe must also move quickly to stabilise the banks at its core in ways that go far beyond what the European Central Bank announced on Wednesday. As senior BNP Paribas executives prepare to tour the Middle East in an attempt to raise fresh funds and shore up confidence, other banks must also show greater urgency and seriousness in dealing with capital and asset quality shortfalls.
Much of the discussion on the crisis is based on the assumption that sovereign debt is both the problem and the solution. Initially, this was correct. The combination of too much debt and too little growth pushed the most vulnerable countries (Greece, Ireland and Portugal) into a classic debt trap. Timid policy responses then fuelled contagion waves that undermined other sectors.
The problem today has become much more complicated. In addition to being on the receiving end, some of these sectors have become standalone sources of regional dislocations.
Italy is, of course, the most visible example. Interest rates on what is the third largest government debt market in the world remain stubbornly high in spite of persistent market intervention by the ECB. Wednesday’s rating cuts of some of the country’s leading banks, following Standard & Poor’s downgrade of the country’s sovereign debt on Monday, complicates matters.
Yet, as notable as this is, it is not the most immediately threatening issue for a global economy that, in the words of Christine Lagarde, IMF managing director, has entered "a dangerous phase". The rapidly burning fuse is in the European banking system, particularly in France, and Europe is getting very close to yet another tipping point.
The facts are striking and worrisome. Private institutions around the world, and even some public ones, have sharply reduced short-term lending to French banks. Credit markets now put their risk of default at levels indicative of a BB rating, which is fundamentally inconsistent with sound banking operations. Bank equity now trades at a 50 per cent discount to tangible book value on average. To make things worse, the ratio of market capital to total assets has fallen to 1 – 1.5 per cent (compared with six to eight per cent for healthier banks).
These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy.
So far neither the authorities nor the banks have done, or are doing enough to stop – let alone reverse – this trend. While the ECB has stepped in to offset the liquidity crunch, including by relaxing collateral requirements to make it easier for banks to access the central bank’s repo window, capital cushions and asset quality remain unaddressed. As a result, Europe is on the verge of losing control of orderly solutions to its debt crisis.
To counter this, fiscal authorities and banks must work with the ECB on three immediate, simultaneous and drastic measures. They must inject capital through public-private partnerships, including through Tarp-like mechanisms, present a realistic assessment of the asset side of the balance sheet and enhance depositor protection. Greater burden sharing with the private sector may also prove necessary.
Through the bitter experience of the last two years, Europe now understands that a sovereign debt problem is difficult to solve. It must now realise that the challenges and costs to society multiply astronomically when this is accompanied with a banking crisis; and it must act accordingly.
Fears grow for Chinese property stocks
by Robert Cookson and Simon Rabinovitch - FT
Chinese property stocks suffered double-digit declines amid growing fears that developers are losing access to funding and will be forced to slash prices. The trigger for Thursday’s tumble was a Reuters report that the Chinese banking regulator had ordered trust companies to assess their risks from lending to Greentown, the largest builder in the eastern province of Zhejiang.
The news was "another sign that the government is cutting the funding sources for developers", Credit Suisse analysts told investors on Thursday. Greentown’s Hong Kong-listed shares tumbled 16.2 per cent, though the group said it was unaware of any investigation by the China Banking Regulatory Commission.
Other Hong Kong-listed developers that use trust financing include Agile Property, Evergrande, KWG and Shimao, according to Credit Suisse. All four groups fell by more than 10 per cent, while the wider market dropped 4.9 per cent. Chinese property stocks have been in the grip of a savage bear market for more than a year as investors anticipated the effects of the government’s crackdown on property speculation and soaring prices.
"Initially, people were worrying about earnings. What happened [on Thursday] is that people started to worry about balance sheet problems as well as cash flow and funding," said Agnes Deng, head of China equities at Baring Asset Management.
Over the last year, Chinese regulators have issued numerous public warnings and direct orders to the state-owned banks to reduce their exposure to real estate and rein in the flood of credit that has gone to the sector in the last two years.
As a result, the developers turned to other sources of funding, raising more than $6bn by selling bonds to international investors. Since June, however, all but the top state-owned developers have been shut out of international debt markets as bond prices have plunged, leaving China’s nascent trust company sector as the lender of last resort.
In the past few weeks, property prices have started to dip in many cities, after a sharp decline in sales volumes. In Shanghai, once one of China’s frothiest property markets, transaction volumes have slumped more than 50 per cent from a year ago, according to China Index Academy, a data provider. As a result, developers have cut prices by up to 10 per cent on nearly 150 residential projects in Shanghai, Soufun, the country’s top real estate website, said this week.
"The funding crisis will force the developers to cut prices even more," said Gillem Tulloch, head of Hong Kong-based research house Forensic Asia. "The bubble is in the process of deflating."
A moderate fall in prices would please the government. Beijing wants to avoid repeating what it sees as Japan’s mistake in letting real estate prices soar during the 1980s, paving the way for a stagnant decade after they crashed. It is also worried about social fallout, with unaffordable housing one of the chief complaints of urban citizens.
However, property construction is central to the Chinese economy as well as global demand for commodities such as copper and steel, so a full-blown crash is the last thing Beijing wants.
Russia’s banks: Collateral damage
by Catherine Belton and Neil Buckley - FT
Fallout from the rescue of one of the country’s biggest lenders highlights oversight concerns
On a snowy Friday evening in late March, Andrei Borodin received a call as he flew out of Moscow on a private jet. Then president of Bank of Moscow, Russia’s fifth-biggest, he found himself under mounting pressure as VTB, the state-controlled lender that is Russia’s second biggest, tried to take over his bank. Just hours earlier, the government’s budget watchdog had called for his suspension while it audited what it believed were "dubious" loans to entities re?lated to Bank of Moscow.
Police were also investigating him separately over a property loan the bank had made. "Someone called me and said that on Monday the Russian police will officially accuse me of abusing my authority," says Mr Borodin. He never flew back; today he is in exile in an undisclosed location. Within months, Bank of Moscow – a quasi-sovereign lender with shareholders including Goldman Sachs and Credit Suisse – was at the centre of one of the nation’s largest corporate scandals of recent years.
To fill an alleged hole in its accounts far bigger than previously suspected, the government agreed in July to extend its largest-ever bank bail-out. At Rbs395bn, then worth $14bn, it was equivalent to 1 per cent of economic output.
For a while the affair seemed to threaten the stability of VTB, a national banking champion whose assets had mushroomed from $4bn to $120bn in just seven years. The affair has become steeped in controversy because of troubling questions it has raised about bank oversight in Russia – but also because of the central actors’ sharply conflicting accounts.
Andrei Kostin, VTB chief executive, says that after his institution bought an initial 46.5 per cent of Bank of Moscow in February, it found questionable loans worth billions of dollars to businesses related to Bank of Moscow’s senior managers. The bail-out, he says, averted what could have been Russia’s version of the collapse of Lehman Brothers.
Mr Borodin’s camp claims the affair is yet another example of the grabbing of assets by Kremlin-connected businesses seen so often in recent years. They say the hole in Bank of Moscow’s accounts was "artificially created" as a pretext for the bail-out – to benefit VTB, or even cover problems with VTB’s own balance sheet.
Each side vehemently denies the other’s allegations.
The reality may contain elements of both. But either version is unsettling for investors. If VTB is right, how could Bank of Moscow develop such a hole in its books under the noses of regulators – and how many other Russian banks might be hiding similar problems? Mr Borodin’s allegations, on the other hand, highlight concerns about the murky relationship between the state and state-controlled businesses – and also, potentially, about VTB’s finances.
"[This affair] raises big institutional issues about Russia and emerging markets as a whole," says Timothy Ash of Royal Bank of Scotland. "The balance sheets might look good but no one really knows what’s going on behind them."
It all began last autumn, following the sacking by President Dmitry Med?vedev of Yuri Luzhkov as Moscow mayor. Mr Luzhkov, of whom Mr Borodin is a close ally, ran the capital virtually as a personal fiefdom for 18 years. In 1995, he ordered Mr Borodin, a young western-trained banker and one of his advisers, to set up a bank controlled by the city government. By last year, Bank of Moscow was one of the country’s leading lenders, with Mr Borodin and a business partner owning 20 per cent, and the city still holding 46.5 per cent.
Mr Borodin says he was told at a meeting late last year with Sergei Sobyanin, the new mayor, that it had been decided to sell the city’s stake to VTB. It was suggested Mr Borodin should sell his stake, too, and step down as president.
He believes the decision was prompted by the Kremlin. Mr Sobyanin had served as chief of staff to prime minister Vladimir Putin. At about that time, Mr Borodin found himself the subject of a criminal probe by prosecutors – involving tactics such as late-night raids on his home – into a Rbs13bn loan Bank of Moscow made in 2009 to buy land from Mr Luzhkov’s billionaire property developer wife, Yelena Baturina, at what prosecutors allege was an inflated price. Mr Borodin and Ms Baturina deny any wrongdoing.
Despite the pressure, Mr Borodin says he attempted to find alternative buyers for his stake, insisting a VTB deal made no commercial sense. Non-state banks complained the stake was being sold without an open tender. However, VTB bought the city’s stake for $3.7bn in February.
Regulation: ‘The balance sheets are not transparent enough’
When state-owned VTB, Russia’s second-biggest bank, faced a wave of potential non-payments on billions of dollars owed by the country’s largest companies during the financial crisis, its ability to restructure and roll over many of the loans prevented a meltdown across the domestic economy, writes Catherine Belton.
To aid such flexibility, the Russian government pumped in Rbs180bn (then $5.6bn) in capital and extended a Rbs200bn subordinated loan in 2009. But with the crisis over, and bad loans peaking early last year at a reported 10 per cent, VTB’s acquisition of Bank of Moscow is casting a new spotlight on lending practices at Russian state banks.
The $14bn bailout of Bank of Moscow in July sent jitters through the investor community about the quality of oversight and reporting at state-owned institutions. "The fact that some state banks, such as VTB, Sberbank, Gazprombank and Bank of Moscow, appear to have been in a comfort zone is very worrying," says Richard Hainsworth, head of RusRating, an independent rating agency.
Although these lenders produce accounts to international standards, the central bank faces particular difficulties with non-performing loans. Oversight in Russia is carried out according to domestic accounting standards, which do not consolidate assets held in different jurisdictions. This could give banks leeway to hide bad loans by parking them offshore.
"The central bank is not capable of identifying non-performing loans fully. The balance sheets are not transparent enough," says Mikhail Dmitriev, head of the Centre for Strategic Research, a government-connected think-tank.
"There is a big agenda for the central bank in improving accounting standards and enforcing consolidated international financial standard reporting."
According to one senior western economist: "The level of non-performing loans across the banking sector is higher than the official one but [by] how much is impossible to say – because we just don’t know the data."
The other problem the Russian central bank faces is that it lacks discretion to crack down on suspicious activity. Current legislation gives it the power to impose sanctions only on proved breaches of banking law. It is pushing for legislative change that would allow it to probe more deeply into suspected related-party lending and impose sanctions on bank managers and owners found to be faking accounts.
In the wake of recent scandals, the pressure is on for it to finally pass these laws.
When the Financial Times spoke to Mr Kostin that month on the 58th floor of VTB headquarters in Moscow’s new financial district, he was buoyant. "In the next month, we will regulate the entire situation [with Bank of Moscow]," he said. The two sides continued to clash over price. But days before he fled Russia, Mr Borodin sold his stake to a Kremlin-connected businessman he understood to be acting as an intermediary for VTB.
. . .
The way Mr Kostin tells it now, things soon started to go sour. Only after a court order in April ousted Mr Borodin as Bank of Moscow’s president – weeks after he fled the country – was it able to get full operational control.
Mr Kostin claims VTB then un?earthed Rbs366bn of loans by Bank of Moscow it believes were related to Mr Borodin’s team. "It can’t happen in any civilised state that a manager of [a] bank can invest more than 40 per cent of the loan portfolio in his own assets," he told the FT. "The necessary bank procedures were violated."
Some Rbs116bn, he says, was secured by a "not bad" level of collateral. Another Rbs100bn was lent to enterprises linked to Mr Borodin and his management team, such as a timber company, wine and spirit makers and city construction projects. Mr Kostin believes 70 to 80 per cent of the value of these loans can be recovered.
But Rbs150bn was, he says, lent in very small volumes, often without collateral, to mainly Cyprus-based offshore companies. Together with Russia’s central bank, which carried out its own subsequent probe that supported VTB’s findings, Mr Kostin claims these appear to be related to Mr Borodin. "We believe that about Rbs70bn of this was just lent to pay interest rates on loans already extended ... This was a pyramid scheme," Mr Kostin says.
As VTB struggled to get a grip on its acquisition’s finances, delays in publishing Bank of Moscow’s audited 2010 results threatened to put it in default on $2bn in foreign currency bonds. Analysts began to question whether VTB’s own $8bn in foreign currency bonds could also be in cross-default as a result. In July, the central bank announced the huge bail-out.
"I think [VTB executives] screamed blue murder," says one banking insider. "It could have put into danger the whole of VTB, [with] a knock-on impact on the Russian government." Mr Kostin says the authorities had to act. "The decision was taken that Bank of Moscow has the status of too big to fail," he says, citing its 4.5m depositors, Rbs200bn debt to the state, and $3bn to foreign creditors.
. . .
Yet many questions remain. Though Alexei Kudrin, finance minister, has called for a criminal probe, none has officially been launched against Mr Borodin or other former Bank of Moscow managers over its lending practices. An international arrest warrant, issued for Mr Borodin two months after he left Russia, relates to last year’s property loan investigation, not the wrongdoing VTB alleges.
Mr Borodin and his team of lawyers and public relations advisers say it would have been impossible for Bank of Moscow to engage in the activities VTB alleges. All loans above $10m went through a credit committee working to international standards. Five central bank employees, more?over, had worked inside Bank of Moscow ever since it received a small amount of state support in the 2008 financial crisis.
A spokesperson for Mr Borodin said he could not comment on specific allegations on Bank of Moscow’s lending because neither VTB nor the central bank had ever presented any evidence. But his lawyers have questioned why a $14bn bail-out was needed when only a fraction of that in loans is alleged to be totally unrecoverable, while the rest, even according to Mr Kostin, can be restored.
Mr Borodin has spoken on behalf of owners of assets that received Rbs217bn in loans from the bank, insisting in an open letter to Mr Kostin in May that the value of the collateral behind these loans is Rbs260bn. People close to the former banker suggested the value of this collateral was deliberately undervalued to "create" the balance sheet hole, and grant the VTB and its business partners access to these assets at a rock-bottom price.
"The bail-out was not to Bank of Moscow but to the shareholders of the bank, which is clear evidence that the problems of Bank of Moscow are artificial and in fact the state aid is for someone else," Mr Borodin told the FT. "I set up this bank, I was chairman for 16 years. What would be the reason for me to be cheating, practically, my own business?" he adds.
VTB says it has no interest in any assets held as collateral for the big problem loans – it just wants the loans repaid. It adds that the size of the bail-out was justified by the need to increase provisioning against potential losses.
Regardless of the value of the collateral, however, the Rbs366bn Mr Kostin claims was lent to companies related to the bank would far exceed levels of risk concentration permitted by the central bank. That raises questions about why the central bank saw no risks until this summer, though global rating agencies such as Fitch identified Rbs116bn of loans as presenting a potential "succession risk" after Mr Luzhkov left office.
Alexei Simanovsky, head of the central bank’s oversight department, told the FT that earlier annual probes of Bank of Moscow’s balance sheet had been selective and found no evidence of wrongdoing. His team had uncovered only a limited volume of small loans to offshore businesses that did not appear connected to Mr Borodin.
"We were not able to guess that apart from this handful there were dozens of others and they were all related." "The management of the bank had a good image. It just did not enter your head," he says.
But Richard Hainsworth, of the RusRating rating agency, accuses the central bank of "poor auditing". Since the 2006 murder of Andrei Kozlov, a deputy central banker who crusaded for greater transparency, the regulator has become "a toothless tiger", he says. Officials let banks slip through loopholes as long as their activity conforms to the letter of the law.
Such apparently lax oversight powers are giving investors considerable pause. But it was the size of the bail-out that shocked them most. "This raises much broader questions about whether lending practices are any tougher at other state banks," said one senior economist, speaking on condition of anonymity.
As Russia struggles to return to the growth rates it enjoyed before the global recession, questions over potential systemic risks hidden in its opaque banking system are the last thing the country needs.
Belligerent Berlusconi Toys With Europe
by David Böcking - Spiegel
Italian Prime Minister Silvio Berlusconi refuses to recognize that his country is in trouble. Vast debt, sluggish growth and rising borrowing rates indicate that Rome too may be infected by the euro-zone debt crisis. But the EU has few tools at its disposal to get Italy to take action.
After ratings agency Standard & Poor's downgraded Italy's credit rating a notch on Monday night, Prime Minister Silvio Berlusconi immediately went on the offensive. The appraisal of the country's economic state seemed to be "dictated more by media reports than reality," he said. The Italian government is already balancing the budget, he added.
In reality Berlusconi has only just begun working on savings measures -- a reaction to massive pressure and repeated market fluctuations. His behavior demonstrates the leader's intention to cling to the populist style of governing until the bitter end. But the powerful media mogul's stance also betrays the limits of European Union influence on its indebted member states -- at least those that haven't yet been forced to accept a bailout.
That Italy might ultimately need financial support, to be sure, can't be ruled out. Certainly, in contrast to Greece and Portugal, the country has a powerful economy and still counts among the world's biggest industrial nations. But Italy's national debt, some 120 percent of its yearly economic output, is surpassed only by Greece within the EU.
Moreover, the Italian economy has grown only weakly in recent years, meaning that there is too little tax revenue to reduce its debt. And financing that debt has become more expensive as interest rates rise. In August 2010, interest rates on Italian government bonds were 3.8 percent. One year later, that number had jumped to 5.3 percent.
Large debts, weak growth and rising interest rates: These are the same symptoms exhibited by the three euro-zone countries that have already required financial assistance from their currency union partners. Saving Italy, however, would be vastly more difficult. Its debt is simply too great.
The danger has long been recognized in Europe. But as long as Italy has not drawn on financial assistance, EU influence remains restricted. Even after S&P's credit downgrade and Berlusconi's aggressive reaction, European leaders can only make appeals. A spokesperson for European Economic Commissioner Olli Rehn urged Italy to immediately enact its savings resolutions. Gerda Hasselfeldt, head of the state parliamentary group for Bavaria's conservative Christian Social Union (CSU), called the downgrade a "good and necessary incentive." Peter Altmaier, a leading member of Chancellor Angela Merkel's Christian Democrats , said: "The case of Italy shows that we're not just talking about Greece."
As slightly less diplomatic analysis came from the president of Confindustria, an organization representing Italian manufacturing and service companies. "We are sick and tired of being the international laughingstock," Emma Marcegaglia said. The government must either "enact quick, serious and also unpopular reforms" or "pack their bags," she said.
Her harsh statement shows the pent up frustration over Berlusconi's crisis management. For a long time the prime minister saw no reason to act at all. When the government passed austerity measures worth some €47 billion in July, Berlusconi boasted about how harmless it was. "We have avoided every drastic measure taken by other European countries," he said. "The Italians should build us a monument."
Wavering by Berlusconi
Such statements were not exactly designed to win back the faith of investors. If anything, market pressure only increased, forcing Rome to put together a second package of belt-tightening measures worth €45 billion. But even that proved hardly reassuring after Berlusconi sought to water-down the package. He attempted to remove a wealth tax from the package only to backtrack just days later.
Such wavering by Berlusconi can hardly be influenced from abroad. Imposing serious savings measures on Rome would only become possible should Italy be forced to apply for financial assistance.
Without a formal means to apply pressure on Italy -- such as might be provided by a European economic government, for example -- the EU can only apply backroom pressure. This is the route the European Central Bank (ECB) reportedly took by sending a confidential letter to Berlusconi with a list of demands for concrete reforms.
Fulfilment of those demands could be seen as a kind of reciprocity. The ECB has long been buying significant quantities of Italian sovereign bonds in order to keep Rome's borrowing costs as low as possible. Such purchases are controversial within the ECB, with both former German central bank head Axel Weber and chief ECB economist Jürgen Stark having resigned recently, allegedly in protest at the practice. The new Bundesbank head, Jens Weidmann, recently criticized the purchases in an interview with SPIEGEL .
Ongoing Bond Purchases
But the ECB appeal apparently was not enough to convince Berlusconi of the precariousness of the situation. "Unfortunately, it takes much too long for governments to recognize the seriousness of the situation and to take appropriate action," Ulrich Kater, chief economist at Dekabank, told the business daily Handelsblatt on Tuesday.
Indeed, it would appear that concern about Italy's current debt situation is such that the ECB can no longer tamp it down with bond purchases. Jörg Krämer, chief economist of Commerzbank, pointed out to the paper that the risk premium on Italian bonds is continuing to climb even though the ECB "is aggressively buying state bonds and thus effectively financing state expenditures with the printing press." Europe's central bankers, it would seem, do not see an alternative to the strategy. On Tuesday, traders say, the ECB once ag
Spain’s Banking Mess
by Floyd Norris - New York Times
It’s not just sovereign debt.
Just when markets were focused on the risks of a Greek default and the possibility of contagion to other countries, Spain’s central bank reported this week that things were getting worse for that country’s banks — but not because they held a lot of Greek debt or bonds issued by other troubled European economies. The problem, instead, is the same old one. With Spain’s economy weak and home prices falling, bad loans are growing. And the central bank thinks things are getting worse.
In a surprisingly frank presentation to investors in London on Tuesday, José María Roldán, the Bank of Spain’s director general of banking regulation, said that Spanish land prices had fallen about 30 percent from the 2007 peak, adjusted for inflation, and that home prices were off about 22 percent. "In both cases, we expect further corrections in the years to come," he said. For land prices, he said, the bank’s "baseline scenario" was that prices would fall to little more than half of the peak level. The "adverse scenario" indicated that the decline could be significantly worse.
That was a significant change from a presentation he made in February. Then, with home prices down about 18 percent from the peak, he argued that the decline was similar to past cyclical downturns and that prices were likely to begin rising soon.
Remarkably enough, collapsing home prices have not left Spanish banks holding large amounts of bad mortgage loans, thanks largely to the fact the Spanish mortgage market operated during the boom in far different ways than the American market.
But if lending to home buyers was conducted in a far more prudent manner than it was in the United States, lending to real estate developers and construction companies was, if anything, more irresponsible. The higher land prices went, the more eager the banks were to push out loans.
The story of how Spain’s banks got into the mess — and the way its mess differs from that of American banks — show that it is impossible for banks to walk away from a collapsing bubble in real estate. It also shows that the structure of mortgage markets can make a major difference in how a collapse plays out.
The figures released by the central bank this week showed that by the middle of this year, 17 percent of Spanish bank loans to construction companies and real estate developers were troubled — or "doubtful," the term favored by the central bank. That figure has been rising rapidly, reflecting the deterioration in real estate values.
When the financial crisis first broke out, in 2008 and 2009, it appeared that Spanish banks were in a better position than most, in part because of regulation that had kept the big banks from making some of the mistakes others made.
But it turned out that smaller Spanish savings banks were heavily exposed to a real estate market that had outpaced even the United States’ market for a time during the first decade of this century. That market continued to rise after the American housing market stopped climbing.
The Bank of Spain has created a program to force mergers of the smaller banks and to bring in better management. It has put about 11 billion euros into the banks to recapitalize them, and is putting in another 15 billion euros in a process that is supposed to be completed by the end of this month, said Antonio Garcia Pascual, the chief Southern European economist for Barclays Capital. But, he added, "our estimate is that the overall number needed is closer to 50 billion euros."
The banks are bleeding from loans secured by raw real estate, and from loans for construction. The pain is made worse because such lending soared during the property boom. It is those loans that are now devastating bank balance sheets, as developers who borrowed to build offices, stores and neighborhoods saw demand dry up and now cannot pay the banks back.
Other corporate loans are also showing weakness, as would be expected when unemployment is above 20 percent and not expected to improve for at least two years, but less than 5 percent of those loans are said to be doubtful. There are also signs of trouble in car loans and other loans to individuals.
And then there is the mortgage market. Perhaps the most remarkable statistic in the reports released by the Bank of Spain this week was the low percentage of mortgage loans that appeared to be in trouble. It is just 2.5 percent, half a percentage point less than in mid-2009. If American mortgages were doing as well, there would be far less angst here.
How can that be? The most important fact may be that refinancing is very unusual in Spain. They are generally unnecessary; since mortgage loans are made at variable rates, there is no need to take out a new loan if rates are declining. The absence of refinancing, along with the absence of home equity lines of credit, meant homeowners could not take out cash to spend on other things.
As a result, if you bought a house in Spain a few years before the peak, you still have equity in the home, even with prices down. If you lose your job and can no longer afford the payments, you can sell the home and emerge with something.
That would also be true in the United States if mortgages were for only house purchases. But in the housing cycle that led to the recent bubble — unlike previous cycles — it was far easier for homeowners to cash in their equity and use the money for whatever they wanted. So some people who have been in the same home for decades are desperately under water.
There were other differences as well. There were no "originate-to-distribute" strategies in the mortgage markets, so the loans were not bundled into securities to be sold to foolish investors.
Banks that made the loans expected to profit if — and only if — they were repaid. There were few loans to investors who planned to rent or flip homes. Moreover, mortgage loans in Spain are recourse. Buyers cannot walk away if they have other assets, as they can in some American states.
The Bank of Spain has said it is emphasizing transparency in seeking to fix the banking system, and that it is willing to be flexible as conditions change. Its openness may be winning over investors. No one likes to hear bad news, but it is reassuring to believe that the news is accurate, rather than sugar-coated.
I have not seen other banking regulators distributing charts forecasting that the biggest problem facing their banks was likely to get significantly worse, as the Bank of Spain did this week. It has been more common for regulators to seek to weaken accounting rules, on the theory that it will help confidence if banks seem to be strong, regardless of the facts. That is an attitude that has backfired, particularly after the European stress tests chose to assume that all sovereign debt was safe.
Rather than denigrate markets as being foolishly negative — as some other European officials have done recently — Mr. Roldán cited market trends, including the rising cost of credit-default swaps on the banks, as evidence of the problems confronting them. It is a refreshing attitude in a regulator. When, and if, Mr. Roldán ever starts to say the worst is over, it will be a lot easier to believe him.
Swiss Must Save UBS’s Bonus Pool or Die Trying
by Jonathan Weil - Bloomberg
Ever since UBS disclosed its latest gigantic loss, due to a supposedly rogue trader in London, the financial press has been obsessed with digging out trivial details, such as what the scandal means for the future of global banking regulation and whether it will cost UBS Chief Executive Officer Oswald Gruebel his job.
Then there’s the real story. Inside UBS’s vast investment- banking operation, we can pretty well guess there’s only one question that matters: "Does this affect my pay?" The short answer is it might. Only it doesn’t have to be this way.
On Sept. 19, Bloomberg News published an article under the headline, "UBS Bonuses at Risk as $2.3 Billion Trading Loss Erases Profit." As you can see, this year’s UBS bonus pool isn’t doomed, per se. It’s "at risk." And where there’s a risk there’s always a way. What the UBS bankers need is a plan to ensure that the people who bear this loss are people other than themselves.
Luckily, I have prepared one. To save the UBS bonus pool, UBS’s leaders must persuade the people of Switzerland to eat the losses the company is blaming on Kweku Adoboli, and to do so with joy in their hearts. Impossible, you say? Consider the following talking points:
No. 1: Reimbursing UBS for the $2.3 billion would be an investment in the country’s future.
Surely it will cost Swiss taxpayers much more money later if they skip paying this small ante now. UBS’s writedowns during the last financial crisis topped 50 billion francs ($56 billion).
To keep UBS afloat, the Swiss government put up 6 billion francs of bailout dough and took almost 40 billion francs of rotting assets off the company’s books. Better for the Swiss to nip these new "rogue trading" losses in the bud while they can.
No. 2: If the bankers don’t get their bonuses, the best and brightest UBS employees will leave for competitors.
Somebody has to stick around to clean up the mess being pinned on Adoboli. The Swiss must decide: Do they really want all of UBS’s best talent to leave for National Bank of Greece? Or worse, Deutsche Bank? This, too, would inevitably lead to even bigger losses later, which brings us to our next point.
No. 3: UBS isn’t actually a bank.
The Swiss government is the bank here, not UBS. In reality UBS is an off-balance-sheet SIV, or structured-investment vehicle, backed by the Swiss government. UBS shareholders and employees are the SIV’s "first-loss holders," as they’re known in the trade. (UBS bondholders, as we all know, are prohibited by international law from incurring losses.)
Normally the first-loss holders would exist to serve as a buffer, like swampland absorbing the storm surge from a hurricane, except these aren’t normal times. The better off the first-loss holders are, the safer the world will perceive UBS to be. So when the Swiss people rescue the UBS bonuses, what they’re doing is restoring the first-loss cushion to its rightfully bloated condition. And by doing so they’re saving themselves.
No. 4: Rescuing the bonus pool promotes Swiss competitiveness.
Anyone with even a passing knowledge of international debt markets knows that the price of Swiss government bonds has become ludicrously expensive. The flight into Swiss francs earlier this year has made life miserable for Swiss exporters. A standard-issue Rolex costs more than a five-bedroom house in Detroit.
Viewed in that light, it could reasonably be argued that UBS isn’t losing anywhere near enough money to meet Swiss society’s needs. UBS finished last year with $1.4 trillion of assets, almost triple the size of Switzerland’s $524 billion annual gross domestic product.
Rather than purchasing unlimited quantities of foreign currencies to stop the franc from strengthening, a more efficient approach would be to tell the world that UBS is in grave danger of failing and that the Swiss people are eager to pay UBS bankers whatever bonus money is needed to turn the government’s budget surplus into a crippling deficit. With one bold gesture, the franc would plunge to new depths. Yields on Swiss government bonds would soar. And all of Switzerland would be richer for it.
No. 5: This is a matter of fairness.
When poor people lose their money, it’s a tragedy. There are so many of them, and they had so little to start with, there’s not much government can do, unlike with the wealthy. So the question must be answered: Is it really fair that hundreds of high-net-worth UBS professionals should pay for the alleged sins of a lone 31-year-old Ghanaian trader, just because they failed collectively to oversee him?
The U.S. let American International Group Inc. (AIG) pay more than $400 million in employee bonuses after that company’s $182 billion government bailout. Shouldn’t UBS bankers have available to them the same kind of social safety net that exists for others of their class? Discuss.
No. 6: The fundamentals of capitalism are at stake.
To paraphrase a line from AIG’s rescue plea, government backstops are the oxygen of the free-enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined, and we would all be on the road to serfdom.
The failure of the UBS bonus pool at a time of major global and economic instability would exacerbate the challenge of reigniting consumer confidence. Because Swiss banking has changed greatly in character over the last decade -- from just a basic provision of tax-evasion services to a vehicle for massively leveraged speculative wagering -- the effects of disrupting the industry are wide-ranging and significant.
The message for Switzerland is simple: You can’t fix the UBS bonus pool unless you save it first. I’m confident the Swiss will do the right thing.
A Visit to J-Village: Fukushima Workers Risk Radiation to Feed Families
by Cordula Meyer - Spiegel
Since the nuclear disaster at Fukushima, the power plant's operator TEPCO has relied on temporary workers to help bring the reactors under control. Many of the workers, whose radiation levels are measured daily, say they are not doing the work for Japan, but for the money. SPIEGEL visited J-Village, which is strictly off-limits, and met the unsung heroes of Fukushima.
Milepost 231 now marks the end of the road. Barricades prevent traffic from proceeding farther north on Highway 6, a four-lane road that leads to the ruin of the Fukushima Daiichi nuclear power plant. Men in uniform are waving stop signs. In the evening twilight, a red illuminated sign flashes the following message: "No access… disaster law." Two policemen armed with red glow sticks vigorously turn away every lost driver. Three of their colleagues are blocking the exit to the right. They yell at anyone approaching on foot.
A total of 20 officers guard this intersection, day and night. To the right of the road block, the highway leads to J-Village, a former training center for the Japanese national soccer team. Since March 11, Japan's largest soccer complex has been transformed into the base camp for Japan's peculiar heroes -- the workers who are trying to regain control of the crippled Fukushima Daiichi nuclear power plant.
More than 1,000 of these workers prepare themselves for their shifts here, day after day. The TEPCO power company, which is the operator of the stricken nuclear power plant, sponsored construction of the sports facility years ago. Since it has become the hub for the nuclear cleanup workers, though, the company has sealed off the area to the media and the general public.
Only buses and vans with a TEPCO authorization on the front windshield are allowed to pass. The vehicles shuttle workers to the reactors and back to J-Village. The heads of the exhausted men are visible through the buses' windows: Many of them have fallen asleep during the over 30-minute trip home.
In one of the buses that struggles up the hill to J-Village sits Hitoshi Sasaki, 51, wearing a white Tyvek suit. The construction worker started here three weeks ago. His job is to surface a road to the destroyed reactor. The job involves laying down steel struts that will make it possible to support a 600-ton crane, which will be used to pull a plastic protective cover over the ruins.
Standing in Line for Radiation Checks
Sasaki's first stop in J-Village is the gymnasium to the right of the main building. Long lines of workers wearing protective suits and masks march up to the building. There are boxes at the entrance of the gym, and Sasaki pulls the plastic covers off of his shoes and places them in the first box. Then the respirator, the white protective suits made of synthetic paper and the gloves are each placed in additional boxes.
A number of workers trudge toward the gym; hardly anyone speaks. Some stumble when they have to stoop over to strip off the plastic covers from their shoes. Others rip off their suits with both hands, as if every tenth of a second counts before they can finally remove the hot and sweaty suits from their bodies. Then they stand in line for radiation checks.
Most workers wear only long-sleeved dark-blue underwear under the suits. Those who have to spend particularly long periods in the oppressive heat and humidity are also allowed to wear turquoise vests under their protective suits. These vests contain a coolant designed to protect the men from heat exhaustion. Several workers have already collapsed. In August alone, 13 were admitted to an emergency room set up in front of reactors 5 and 6. A 60-year-old worker died in May, presumably of a heart attack.
A team of workers who have been quickly trained in radiation levels checks each man's exposure. The inspectors are wearing protective suits, blue caps and paper masks. Under the basketball hoop at the end of the gym, folding tables have been set up with four mobile Geiger counters, and next to these are three permanently installed radiometers.
The inspectors are holding bulky instruments and gazing at the gauges. They move the sensors first over the head of each worker, then left and right along the arms, chest, abdomen and legs. During the check, the workers stand on a mat with an adhesive film designed to capture radioactive particles. Many of the men are young and look as if they are in their early twenties, but a number of weary old men are also among them.
Temporary Workers Doing the Dirty Work
One of the workers feels that the public has a right to know what is happening in J-Village. He has decided to speak with SPIEGEL, although he would prefer not to give his name. He will be referred to as Sakuro Akimoto here. On busy days, he says, more than 3,000 workers pass through the radiation detection station.
Every day a brigade is deployed to the Fukushima Daiichi nuclear power plant in an attempt to bring the stricken reactor under control. The workers toil in sweltering heat and dangerously high radiation levels. The maximum annual dose for workers in Japanese nuclear power plants is normally 50 millisievert. After consulting with the authorities, TEPCO has decided to raise the maximum allowed dose to 250 millisievert, high enough to significantly increase the likelihood of developing cancer.
Some 18,000 workers have helped manage the disaster since March 11. Most of them are not employed by TEPCO, but by subcontractors, who in turn recruit their workers from temporary employment agencies. Before the tsunami, many of these temporary workers had already done their fair share of the dirty work at other nuclear power plants. Most of them are not doing this to save Japan, but to feed their families. Sasaki, the construction worker, has also come for the money. He was approached by a company from Hokkaido in northern Japan where he lives. As a young man, he had helped with major overhauls at other power plants.
Each morning, says Sasaki, he dons his suit and mask in J-Village, and makes a second stop behind the plant's gates. Here he has to put on a lead vest, and over this an additional protective suit made of especially thick material, safety glasses, a mask that covers his entire face, and three different pairs of gloves, one on top of the other. "It is so unbearably hot," says Sasaki. "I feel like pulling the mask right off my face, but that's not allowed anywhere." Nonetheless, there are reports of workers who take off their masks, sometimes to smoke a cigarette.
'It Looks Much Worse There Than on TV'
There are meetings in the morning where every worker finds out what he is doing that day, after which the buses head off to the reactor. Sasaki is only allowed to work one hour per day, or at most 90 minutes, otherwise he will receive an excessively high dose of radiation. Then he heads back to J-Village, and on to his boarding house in Iwaki- Yumoto, where he shares a room with three men. Days like this have him on the go for six hours.
Sasaki is a small but muscular man. His arm muscles ripple under his black T-shirt. He vividly remembers how he saw the destroyed reactor for the first time in mid-August. "It looks much worse there than on TV," he says. "Like New York after September 11. Destruction everywhere." He hasn't told his family that he works at the plant. He doesn't want them to worry.
He has his own worries. He needs the money, which is just under €100 a day. But if things keep going like this, he says that he will only be able to do the job a few more weeks until he reaches his company's radiation limits.
Workers Pushed to Their Limits
TEPCO is preparing to spend decades in J-Village. Workers have spread gravel around the large soccer stadium and in a number of adjacent areas. Here they have placed row after row of gray trailers. There are 40 per row and they sit two stories high, extending right up to the blue plastic seats in the stands.
The stadium's large scoreboard still hangs behind this makeshift community. The stadium clock has stopped at 2:46 p.m., which was the moment when the earthquake cut off the electricity here and at the power plant 20 kilometers (12 miles) away. Now, the power is on again and white neon lights illuminate the rows of trailers. In one room the workers can pick up bento boxes. Next door TEPCO has built a laundromat with more than a hundred washing machines. Behind the main building in J-Village, buses are parked on the former soccer fields and debris is stored in large plastic bags on the tartan track.
Stacks of Contaminated Suits
In the courtyard of the main building, TEPCO has had a small store built, where workers can purchase cigarettes and tea. Some of them, still wearing their work overalls, have gathered around a number of ashtrays and are smoking in silence. There is an Adidas advertisement glued to one of the doors and an obsolete warning sign: "No SPIKES!" An exhausted worker is asleep on the floor in the hallway.
In the window of the atrium hang huge banners for TEPCO Mareeze, the soccer team that belongs to the energy company. In the center of the building stands a panel with a large white and green map of J-Village. There was a time when this was there to help athletes find their way around. Now, a man in a TEPCO uniform stands here and uses a red felt pen to post the current radiation levels for over a dozen different places on the premises.
Three TEPCO employees are sitting nearby with their laptops. The workers hand them their daily dosimeters. In return, they are given a receipt that resembles a cash register sales slip and shows the dose of radiation that they have received that day. In the corridors hang large framed photographs of famous moments in soccer history.
One of them shows German goalkeeper Manuel Neuer during the match between Germany and England at the 2010 World Cup. Outside on the covered playing field, eight goal posts have been pushed aside and are nestled together. Workers' underwear has been hung out to dry on one of the crossbars. At the entrance someone has used pink tape to attach a sign to the bare concrete: "Caution! Contaminated material." Behind this sign, used protective suits and masks are stacked in piles that are 4 to 5 meters high.
Three Shifts Around the Clock
A stooped-over man in a white and blue uniform leads the way to the far corner, where radioactive dirt is lying in a kind of rubber pool. The man says the dirt was washed off cars that had been close to the reactor. Nearby, someone has taped markers to the artificial turf, much like the ones that runners use to gauge their run-ups. Here, however, workers have written radiation levels on the tape. With every meter that you approach the pool, the radiation levels increase: 4.5 microsievert, 7.0 and then, finally, one meter away: 20 microsievert.
The men from the radiation detection team bring new bags full of refuse from the gym out onto this field every few minutes. The work here at J-Village is less dangerous than at the reactor. "There are two types of jobs," says Sakuro Akimoto. "Either you work in J-Village for many hours with less radiation or in Daiichi for fewer hours, but at radiation levels that are 10 to 100 times higher." Akimoto is tall and wiry. He wears his hair short and loves casual jeans. He started working 30 years ago, right after leaving school, for a company that does maintenance work for TEPCO.
There are hardly any other jobs in the village where he comes from, which is located near the power plant. On March 11, he was working at the plant and was able to flee in time to escape the tsunami. His village was evacuated. A few weeks later, he says, he received the order to come to J-Village, "whether I wanted to or not." But he says he also felt a sense of responsibility because the plant had brought so many jobs to the region.
The members of the radiation detection team are now working in three shifts around the clock. He has often seen workers "at their limit -- not only physically, but also mentally." Most jobs are simply dirty work, he says. According to Akimoto, many of his co-workers who work for subcontractors had no choice but to come here. "If they refuse, where will they get another job?" he asks. "I don't know anyone who is doing this for Japan. Most of them need the money." Whenever possible, highly qualified workers like Akimoto are only exposed to comparatively low levels of radiation. After all, they will be needed later.
A Move to Raise Radiation Thresholds
In an internal paper, Japan's nuclear safety agency NISA warns that there will soon be a lack of technicians because too many have exceeded their radiation limits. As early as next year, NISA anticipates that there will be a shortage of 1,000 to 1,200 qualified workers, "which will severely affect the work at Fukushima Daiichi and at nuclear power plants throughout the country."
The nuclear safety agency's solution is simple: create higher thresholds. It recommends raising the limits to allow workers to be exposed within a few years to significantly greater amounts of radiation than before.
By mid-August, 17,561 men had been registered at the Health Ministry as radiation workers. There are plans to monitor their health in a future study. Six of them have been exposed to radiation levels exceeding the high limit of 250 millisievert. More than 400 people have been exposed to levels exceeding the normally allowed 50 millisievert.
And TEPCO simply does not know about some of its workers. Despite months of searching, the company can no longer locate 88 workers who were employed in the power plant from March to June. The company had merely handed out badges to contractors without meeting the workers in person. Worker IDs with barcodes and photos have only recently been introduced.
Earning €100 Per Day
Hiroyuki Watanabe is a city council member from Iwaki, the city that lies to the south of J-Village. For the past two years, he has been trying to determine where TEPCO recruits its workers. "The structure is dodgy," says Watanabe. "It is amazing that one of Japan's largest companies pursues such business practices."
In fact, TEPCO has been using shadowy practices to acquire its workers for a number of years. In 2008, Toshiro Kitamura from the Japan Atomic Industrial Forum criticized the Japanese power company for "outsourcing most of its maintenance work of nuclear power plants to multi-layered contractors." The industry expert's main concern, however, was the safety risk, since these workers are not as familiar with the reactors as permanent employees.
According to Watanabe, TEPCO has budgeted up to €1,000 per person per day to pay the workers. But unskilled workers, he says, often receive only about €100 of that money. "These are men who are poor or old, with no steady job and limited employment opportunities," he says. Some of them don't even have a written employment contract, he contends. When they reach their radiation exposure limit, he adds, they lose their jobs and the employment agency finds a replacement.
Watanabe wants to ensure that all workers are paid appropriately. Even the lowest ranking workers should have a trade union, he says. "If we have a problem, we have nobody to turn to," says a young worker who is eating dinner along with seven co-workers at the Hazu restaurant in Iwaki-Yumoto. They are drinking beer and sake with their meal and smoking countless cigarettes. The men actually don't want to talk about the power plant -- but they go ahead and do it anyway. They also talk about their families and the fear of the radiation and its consequences.
'Somebody Has To Do It'
Next door in the laundromat, 24-year-old Yutaka is stuffing his socks and T-shirts into a washing machine. He is wearing plaid shorts and a polo shirt with a matching collar. Every night in his boarding house room, he calculates his current level of radiation exposure.
"To be honest, it makes my wife worried," he says. He has no intention of quitting, however. "Somebody has to do it," he says. Yutaka is in charge of the break room. His wife has been living far from here ever since they were evacuated. "I don't know if we will ever be able to return," he says.
The presence of so many workers has fundamentally changed Iwaki-Yumoto. This small town on the southern edge of the exclusion zone was known for its hot springs, which attracted large numbers of tourists. Now, there are no more tourists, and many residents have also fled. The hot springs are still very popular, though now it is with the workers. Between 1,000 and 2,000 of them live here now, says a hotel owner in the city. There are plans to move many of them soon to new trailers on the playing fields of J-Village.
One of the workers in Iwaki-Yumoto comes from the now-abandoned village of Tomioka in the restricted area. He smokes Marlboro menthols, and his arms and legs are covered with tattoos. During the day, he works in front of reactor 4, assembling plastic tubes for the decontamination system.
The hardest thing for him, he says, is the daily trip to work. The bus drives past his house twice a day, passing directly in front of the bar where he used to play pachinko, a Japanese game similar to pinball. "I feel sad when I see it all so empty," he says. He says he dreams of returning there some day to play pachinko again.