"New York Stock Exchange, Wall and Broad Streets"
Ilargi: There were mass protests in Portugal today. The country has been largely left outside of the international media recently, but the people in Lisbon still hurt. Austerity raises electricity and gas prices at the same time that jobs are lost en masse.
No-one in southern Europe bats a surprised eye at this anymore. It's become a way of life. Both the new-found poverty and the rising protests. Or perhaps we should say: the rising spirit of protest. The first waves of it have passed this spring and summer, and have done nothing to stop the cuts.
Time for Protest 2.0. The more cuts there are, the more protests there will be. For now, the world is mesmerized by lofty notions of the Arab Spring, and how it was supposed to bring democracy to the backwaters of the planet.
1000’s of deaths later, there's precious little democracy, and countries like Portugal are set for the next wave of banners in the streets (along with who knows how many others along the Mediterranean and beyond). In Greece, protests already derail the IMF's assessment of the country's debt.
And now there's Wall Street. Greece sovereign debt is presently rumored to be up for a 75% cut in troika talks. Greek banks hold little else. French banks hold a lot of Greek debt, even own some of its banks. And -enter Wall Street stage left- Morgan Stanley owns a lot of French banks' assets and/or liabilities. Not least of all is in the shape of derivatives.
Hence, Morgan Stanley was down over 10% on Friday. If French banks go down because of their exposure to Greece, Morgan Stanley will go down too. And if Morgan Stanley goes, so does everyone on Wall Street who deals with it. Which is all of Wall Street.
It’s not like you can ringfence Greece, or its banks. There are way too many links between countries on the one side and their central and commercial banks on the other. And many more links between all other central and commercial banks on the planet. There's no way just one major bank will go down the abyss. Whoever's first will take down many others.
And so the vigilantes are licking their chops and waiting for Monday. Not as nervously, though, as all them market watchers all too eager to see the collapse. The vigilantes take too much pride and joy in picking them off one at a time. Pride and joy and profits.
Morgan Stanley is not a commercial bank. It dove 10.47%. Goldman Sachs isn't either. It lost 5.33%. BofA and Citi lost less, even though they're basket cases. It goes something like this: as per Aaron Lucchetti for the Wall Street Journal:
Morgan Stanley Takes HitsThe concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business.
Ilargi: Yeah, the most threatened banks on Wall Street are now those that don't have a direct grip on your cash. And/or are in bed with France's financial system. Which sleeps with Greece, which sleeps with Bulgaria and Albania and Romania. Oh, and French banks are way over their necks into Italy. Just so you know.
Funny how we haven't heard much about Wall Street banks and their risks lately, isn't it. Well, not to worry, what's happening to Morgan Stanley will make sure we’ll have them all back on our front pages soon.
In fact, Tim Geithner's trip to Europe recently is all about that: get Europe to cover Wall Street's losses and exposure to European banks. Europe's answer: you cover the losses, why should we?!
It looks pretty sure that Germany won’t play along. And it's hard to see from where I'm sitting how the intricacies are lined up exactly, but seeing as Morgan Stanley has $56 trillion in derivatives outstanding, much of which will of necessity be on European sovereign and bank debt, and knowing that JPMorgan and BofA have even larger derivatives portfolio‘s, that 10.47% Morgan Stanley loss on Friday looks like a harbinger of things to come.
No more Markets Mr. Nice Guy for Wall Street; the banks will be knocking on all those Fed windows again soon. And it’ll be interesting to see how Geihtner and Obama react. Feel lucky, punks? Care to risk your re-election? Or do you have your Wall Street funding lined up as we speak?
Methinks it might perhaps possibly be time for electronic pitchforks. If only just to lift our feet out of the morally depleted quicksand we haven't seemed able to get out of by any other means for all this time. For all we know it might feel liberating.
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Morgan Stanley Takes Hits
by Aaron Lucchetti - Wall Street Journal
Concern Over European Exposure Produces Volatile Month
Shares of Morgan Stanley sank 10% on Friday as the New York company continued fending off rumors about its exposure to troubled debt in Europe. The slump ended a month of harrowing volatility for investors in Morgan Stanley. Of the six largest U.S. banks, Morgan Stanley shares moved the most on 10 trading days in September, twice as many as Citigroup Inc.
The concern with Morgan Stanley stems from its small size relative to other global financial firms and its reliance on debt markets, rather than customer deposits, to fund its business. As jitters about potential European debt defaults grow, investors are steering clear of bank stocks that might be dragged down as collateral damage if conditions in Europe worsen.
Morgan Stanley feels the concern more acutely because it is a big player in derivatives, risky opaque contracts that can often backfire on a bank if its risk management doesn't limit losses. The situation at Morgan could turn dire if customers or lenders become skittish enough to flee. Three years ago, Morgan survived during such a panic, when it was essentially propped up by the federal government and secured a $9 billion investment from Japanese bank Mitsubishi UFJ Financial Group.
Morgan Stanley has built up its cash hoard since then and raised more equity as a buffer against potential losses. It also has gotten out of many of the risky trading businesses that eat up capital and can force big, unpredictable losses.
But the firm still is a big player in derivatives. Recent data from the Office of the Comptroller of the Currency showed Morgan Stanley had derivatives contracts with a total notional value of $56 trillion at the end of June. While that number exaggerates the total amount at risk, Morgan's figures exceed the total notional amounts at Citigroup and Goldman Sachs Group Inc. J.P. Morgan Chase & Co. and Bank of America were still well ahead of Morgan Stanley, which had the third- largest total, according to the OCC.
One of Morgan's next challenges might be holding onto key staffers, especially if cost-cutting plans and sluggish markets eat into this year's bonuses. This past week, two senior Morgan Stanley stock trading executives in London, Michel Sindelar and Cyrille Walter, announced they were leaving for Bank of America to work for former Morgan Stanley trading executive Fabrizio Gallo, people familiar with the matter said. Stock trading has been one of Morgan's strong business units of late.
Last week, investors also started focusing on Morgan's exposure to French banks after a website published a report about Morgan's 2010 annual report, which noted $39 billion in gross exposure to French banks. People familiar with the firm's finances said the figure in the report was outdated and included money being held on behalf of clients. The firm's net exposure, which takes into account hedges, is about zero, they added.
But investors don't necessarily trust hedges as much as they used to. And if the hedges are with other weakened banks, the exposure might actually be greater than zero, critics allege. "There's nothing the company can do with its statements because everyone thinks the banks are doing things off balance sheet," says Richard Bove, a Rochdale Securities analyst that has a "buy" rating on Morgan Stanley shares.
Mr. Bove suggested that Morgan Stanley use some of its $182 billion in cash and go back and buy some of its debt, whose yields have been increasing in recent days as concern about the firm grew. Friday, the firm's credit default swaps, which act as insurance against a possible default, rose to $490,000 for $10 million in protection, up from $434,000 a week ago. The debt was more expensive to protect against than Bank of America, Société Générale and Italian bank Unicredit, according to data provider Markit.
Earlier in September, Morgan did buy back some debt, and the firm's chief executive, James Gorman, talked to followers of the stock like Mr. Bove to calm market fears about the company's finances. Morgan Stanley has also attempted to clarify that its derivatives position isn't a concern, when taken in the context of its overall business and when comparing it to other large banks.
Mr. Bove also suggested that the firm could use the 17,000 brokers in its joint venture with Citigroup to boost its deposits, something he says wouldn't be difficult in the current market environment. Investors like to see more money in deposits because it is viewed as more sticky than money from bond investors who might demand exorbitant rates in unstable markets.
Separately Friday, Morgan Stanley settled a civil antitrust case with the Justice Department for $4.8 million involving its work with two New York area power companies.
Le Spleen de Morgan Stanley
by Lisa Pollack - FT Alphaville
All is not well in the kingdom of Stanley. The CDS spreads have blown out and the market is concerned. Very, very concerned. Moody’s Analytics is here to tell us all about why that is.The first [concern] is the exposure of MS to European institutions and the second is the level of trading revenues in the third quarter. MS reported in its second quarter earnings call that net exposure to the GIIPS countries was $5 billion on a gross and $2 billion on a net basis. However, some sources have recently focused on their FFIEC1 reported gross exposures of $39 billion to French banks, which we believe overstates their actual risks significantly.
Anyway, they have a footnote about that $39bn pointing out that it’s gross exposure and so doesn’t account for offsets or other mitigation. Given that, what does Moody’s Analytics conclude?…the recent weakness in their market pricing indicates the degree of sensitivity to any adverse news in the current difficult period. While the headline exposures have spooked the market, we would view this as a short term phenomenon. We expect a correction of this overreaction is very likely. We have viewed MS as a work in progress as they integrate their new retail joint venture (Morgan Stanley Smith Barney) and have recommended them as most appropriate for investors with a longer horizon.
Come on guys, Morgan Stanley(‘s pricing) is just feeling a little touchy. These are trying times, after all. So trying in fact that their CDS curve has become inverted over the past month.
This is indicative of a heightened sense of concern in the near term. The 5-year point, however, is the most liquid CDS contract, so let’s have a look at that. While we’re at it, let’s throw in some Italian banks, since that seems to be all the rage lately.
Not great, but let’s get a bit more perspective by going back a bit further in time.
Not another Lehman moment yet, then. After all, Morgan Stanley is a bank holding company now, and don’t anyone forget it.
How about a more direct peer comparison though.
Wow, they are winning the race to the bottom against… Bank of America. Now there’s a place you don’t want to be.
The S&P at 400 is almost inevitable
by Neil Hume - FT Alphaville
After his brief experiment with technical analysis (well, Killer Waves) uber bear Albert Edwards returns to more familiar ground in his latest Global Strategy Weekly.Jeremy Grantham of GMO says this is "no market for young men". Maybe now I am over 50 it is my time! Yet my forecast of the S&P bottoming at 400 is still met with utter derision. I have been underweight global equities since the end of 1996 and overweight government bonds. Meanwhile US 10y bond yields have fallen from 7% to 1?%, a hair’s breadth from our longstanding 1?% target. Similarly, in my very humble opinion, S&P at 400 is almost inevitable.
Edwards says those who take reassurance that the current 12-month forward S&P 500 PE of 10.5 times is cheap are fools, because earnings have peaked…
… and a third post bubble-recession is looming as are single digit PE’s.Those who do not believe this can happen are still choosing to ignore the reality that has unfolded before their eyes since 2000. In phase 3 of the Ice Age we would apply a 7-8x forward multiple to recession-depressed forward earnings of say $70-75/sh. That gets us pretty close our 400 S&P target. Unbelievable and ridiculous? They said that about our 1?% US T-Note forecast this time last year!
And it’s the same story for Europe, where equities could also fall a long way reckons Edwards.The rout over the last couple of months in European equities may have been a lot worse than the US, but it has merely taken us back to the forward PE seen at the markets nadir in March 2009 albeit lower at 7,5x v 10x on the S&P. But add in the recessionary impact on profits which have already begun to decline and European equity prices might fall a lot further yet, producing probably the buying opportunity of a generation.
Something to look forward to, then.
One Of The Best Economic Forecasters Calls For A "New Recession" In The US
by Joe Weisenthal and Simone Foxman - Business Insider
Lakshman Achuthan of ECRI told Bloomberg Radio this morning the US is "tipping into a new recession."
He told Tom Keene that a recession is the "overwhelming message coming out of our forward-looking indicators." And more ominously: "It is not reversible." "There is virtually nothing that can be done to avert what is going to happen," he said.
Achuthan cites "dozens of leading indexes for the U.S." and "contagion in what is going on among those leading indicators. It's wildfire, it's recessionary, it is not reversible." He says that he cannot be sure when the recession will begin — or even if it has begun already — arguing, "this is not a double-dip" because the U.S. very clearly came out of the last recession. The best-case scenario is for a short recession, lasting about 6 months. However, he noted that he's seen no indicators pointing to a turnaround yet.
What's more, he told Keene that this quick succession of recessions "is very consistent with shifting into an era of more frequent recessions." As for the severity of this oncoming downturn, Achuthan says we just cannot know yet how bad things are going to get. "Whatever the shocks are that you're worrying about today, this morning, if they don't happen you're still going to have a recession, and if they do happen it's going to get a lot worse."
He added that he "wouldn't be surprised" if unemployment rose to double digits, and said that exports — which had held up the economy earlier in the year — were about to go down the tube. A recession, in Achuthan's terms, happens when "sales disappoint, so production falls, so employment falls, so incomes fall, and then sales fall again."
He clarified, "When I call a recession...that means that process is starting to feed on itself, which means that you can yell and scream and you can write a big check, but it's not going to stop." Achuthan has a great track record. In Summer 2010, while the market was diving, he insisted there was no recession on the way.
Obama needs a euro solution; he wants to stay in the White House
by Dominic Rushe - Guardian
"Europe is going through a financial crisis that is scaring the world," Barack Obama said this week. For that, read: it's scaring the hell out of me. Barely a week goes by when the president of the world's most powerful nationdoesn't deliver a message to Europe to get its house in order, his comments betraying anxiety about his re-election prospects if the global economy continues to founder on the rocks of European debt and US growth fails to pick up before next November.
His treasury secretary, Tim Geithner, has been similarly outspoken, even travelling to the European finance ministers' meeting in Poland two weeks ago to urge more action. In addition, his fingerprints were seen all over the suggested rescue plan for the euro that emerged from last weekend's IMF meeting in Washington, reportedly involving an idea to write off half of Greece's debts, recapitalise the continent's banks and leverage up the eurozone bailout plan to a war chest of €2tn (£1.7tn) or more.
The clue was in another of Obama's comments when he said that Europe had "never fully dealt with all the challenges to their banking system", revealing that the White House and, for that matter Wall Street, believes Europe needs to come up with a more convincing show of intent to shore up their part of the global financial system.
It's been brewing for a while. As protests raged across Greece, the euro debt crisis deepened and Wall Street historian Charles Geisst had a worrying sense of deja vu. The author of Wall Street: A History and a finance professor at Manhattan College, Geisst was taking part in a panel discussion for American Banker magazine with William Rhodes, the financier who in the 1980s led a team attempting to tackle the developing nations debt crisis.
After the discussion he talked to Rhodes about his experience of the crisis. Thirty years ago, countries across the world were brought to the edge of collapse by crippling debts, austerity measures were imposed, riots broke out, opinion rounded on bankers, governments and the IMF as massive lending turned to major defaults. It all sounded painfully familiar.
In August 1982 Mexico defaulted on its debt, sparking financial chaos throughout Latin America. "The crisis was hitting European banks hard," said Geisst. But Rhodes told him US banks were more exposed than people realised. "Somehow Paul Volcker [then chairman of the Federal Reserve] managed to keep things very hush-hush. It's not like that now. The world has changed." Yet the fear and panic remain.
The current debt crisis may be further away geographically, but for the US stock markets it might as well be happening on Wall Street. They react to every twist in the ongoing eurozone credit crisis, rising and falling on fact and rumour alike. "We've become very international for a change," said Geisst.
In large part the US's nervy reaction to the euro circus is being driven by technology. The two markets have been close for decades but electronic trading has sped up how they react to each other and tied them closer together. At the same time, US and European banks are more heavily invested in each other. "Exports to the US over 20 years have probably not changed that much, but the exposure of US banks to European banks has rocketed as the US banks have tried to get access to other markets to increase their yields," said Paul Dales, US economist at Capital Economics.
Dales calculates that from 1994 to 2006, the correlation between the US's S&P 500 index and London's FTSE and Eurofirst measure of continental European stock markets was 0.88. A correlation of 1 would mean they moved in tandem, a correlation of 0 would mean they had no relationship. Between 2007-11 the correlation had risen to 0.93.
Simon Johnson, a professor at MIT Sloan School of Management and a former IMF chief economist, tracks the new closeness of this unhappy union back to the 2008 financial crisis: "They've been close since the financial crisis developed, leaving European banks holding lots of US junk."
Johnson said that the current jitters reminded him of the Asian financial crisis of 1997-98, when the collapse of Thailand's currency sparked panic across the region, riots in Indonesia and fears of global contagion. Oil prices collapsed, sparking a crisis in Russia, contributing to the collapse of the giant US hedge fund Long Term Capital Management and panic around the world. "A lot of what happened then was more about perception than reality," said Johnson. He sees the same issue this time. "There's a pattern of euphoria followed by depression followed by euphoria," he said.
In many ways this is worse than the Asia crisis. The world is more entwined, the risk of contagion greater, and the economies affected larger and more resistant to change and outside pressure. It is little wonder then that Obama and Geithner have felt the need to be so vocal. Neither is it surprising that many European countries are unwilling to take lessons from the US, which has shown little appetite for fiscal prudence in recent years.
US markets plunged again on Friday, despite the German parliament agreeing to beef up the European Financial Stability Facility (EFSF) bailout fund. A bigger EFSF is a stop-gap measure, Johnson warned, not a solution.
Mohamed El-Erian, chief executive of Pimco, one of the world's largest bond fund managers, agrees: "The vote was an important step but it is only a small step along a still very long and difficult journey; and the destination remains uncertain. Germany's vote will only be materially meaningful if supported by a number of other urgent steps and, importantly, a clearer vision as to what the politicians wish the eurozone to look like in five years."
Johnson does see one possible way out. "The best parallel is with the US at its foundation, when Alexander Hamilton realised the country needed fiscal union," he said.
In 1790 the first US treasury secretary convinced the new federal government to take on the debts incurred by individual states in their revolutionary war against Britain. His opponents argued some of those states had been profligate and didn't deserve a bailout. Taking on that debt, wrote Hamilton, was "the price of liberty".
Some 220 years later it is the European Union that is being pulled apart by debt, but it's battering the US in the process. And as the crisis rumbles on, there is no sign yet of a leader like Hamilton to take control and determine the price of liberty, let alone who will pay it. Obama is hoping Europe finds the right leadership soon.
NEIN, NEIN, NEIN, and the death of EU Fiscal Union
by Ambrose Evans-Pritchard - Telegraph
Judging by the commentary, there has been a colossal misunderstanding around the world of what has just has happened in Germany. The significance of yesterday’s vote by the Bundestag to make the EU’s €440bn rescue fund (EFSF) more flexible is not that the outcome was a "Yes".
This assent was a foregone conclusion, given the backing of the opposition Social Democrats and Greens. In any case, the vote merely ratifies the EU deal reached more than two months ago – itself too little, too late, rendered largely worthless by very fast-moving events.
The significance is entirely the opposite. The furious debate over the erosion of German fiscal sovereignty and democracy – as well as the escalating costs of the EU rescue machinery – has made it absolutely clear that the Bundestag will not prop up the ruins of monetary union for much longer. Horst Seehofer, the leader of Bavaria’s Social Christians, said his party would go "this far, and no further".
There can be no question of beefing up the EFSF to €2 trillion or any other sum, whether by leverage or other forms of structured trickery. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said.
The best-read story in today’s Handelsblatt is the mounting rebellion against the EFSF in the Bundesrat, the German senate representing the interests of the regions. While this chamber does not have the power to block budget deals, it has begun to express deep alarm about the drift of events.
Marcel Huber, Bavaria’s Staatskanzleichef, gave an explicit warning that the Free State of Bavaria will not take one step further towards an EMU fiscal union or debt pool. "A collectivisation of debts will under no circumstances be accepted. We oppose credit lines for the EFSF or leveraging through the ECB. Our message is simple and clear."
Since the existing EFSF is too small to make any material difference to the EMU debt crisis, this means that nothing has in fact been resolved. We are where we started, almost entirely reliant on the ECB to play the role of lender-of-last resort.
Can it realistically play this role after the double resignation of Axel Weber at the Bundesbank and Jurgen Stark at the ECB itself over bond purchases? Can it defy Europe’s paymaster state for long? You decide.
This great eruption of feeling in Germany has been the transforming political and strategic fact of Europe over the summer. Finance Minister Wolfgang Schäuble is no doubt scrambling around trying to find some formula to breach his pledge that there is no secret plan to leverage the EFSF into the stratosphere.
He will try to pretend that this is not a flagrant double-cross. But his scheming with the French is largely irrelevant at this point. Bigger events are rolling over him. If he really thinks he can dupe the Bundestag yet again, he is out of his mind. And will soon be out of office.
As Bundestag president Norbert Lammert said yesterday, lawmakers had a nasty feeling that they had been "bounced" into backing far-reaching demands. This can never be allowed to happen again. He warned too that Germany's legislature would not give up its fiscal sovereignty to any EU body.
In a sense, the Bundestag vote was much like the ruling by the Constitutional Court earlier this month. It too said "Yes" to the bail-out machinery, but that was not relevant fact. What mattered was the Court’s implicit warning that Germany had reached the outer boundaries of EU integration, that German democracy is under threat, and its explicit warning that the Bundestag’s fiscal powers could not be alienated to Brussels.
Something profound has changed. Germans have begun to sense that the preservation of their own democracy and rule of law is in conflict with demands from Europe. They must choose one or the other. Yet Europe and the world are so used to German self-abnegation for the EU Project – so used to the teleological destiny of ever-closer Union – that they cannot seem to grasp the fact. It reminds me of 1989 and the establishment failure to understand the Soviet game was up.
Our own Chancellor George Osborne has fallen into this trap. I can entirely understand why he is calling for quick moves towards EMU fiscal union, but such an outcome is not on the table.Repeat after me:
- THERE WILL BE NO FISCAL UNION.
- THERE WILL BE NO EUROBONDS.
- THERE WILL BE NO DEBT POOL.
- THERE WILL BE NO EU TREASURY.
- THERE WILL BE NO FISCAL TRANSFERS IN PERPETUITY.
- THERE WILL BE A STABILITY UNION – OR NO MONETARY UNION.
Get used to it. This is the political reality of Europe, since nothing of importance can be done without Germany. All else is wishful thinking, clutching at straws, and evasion. If this means the euro will shed some members or blow apart – as it almost certainly does – then the rest of the world must prepare for the day.
It has certainly been an electrifying few weeks. I happened to be in the room with a group of Nobel economists in Lindau last month when German President Christian Wulff lashed out at Europe, accusing the ECB of violating its mandate and subverting the Lisbon Treaty.
"I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence," he said. "This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market," he said.
Mr Wulff said Germany itself risks being engulfed by escalating debts. Who will "rescue the rescuers?" as the dominoes keep falling, he asked. "Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. "With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult."
More distant relations?
"All I heard was Germany, Germany, Germany. There was nothing about Europe. It was astonishing," said Myron Scholes, the winner of the 1997 Nobel Prize. Indeed it was. Fellow laureate Joe Stiglitz said that if President Wulff’s views reflected the outlook of the German government, monetary union would have collapsed already.
Well yes. Quite.
Strikes hamper Greek rescue effort
by Kerin Hope, Michael Mackenzie and Robin Wigglesworth - FT
Wildcat strikes in Greece have prevented the country’s bureaucrats from finalising next year’s vital budget figures, potentially holding up this month’s release of sorely needed fiscal aid and capping an ignominious quarter for global markets.
Despite a tentative improvement in sentiment over the past week, mounting fears over a potential Greek default and the tepid pace of the global economic recovery led to one of the worst three months on record for financial markets.
The S&P 500 was on Friday set for a drop of 5.7 per cent in September and a decline of 12.9 per cent over the third quarter, its worst performance since the final three months of 2008.
The FTSE All World index was also set for its worst decline since the three months following Lehman Brothers’ collapse in September 2008. It entered official bear market territory in September, shedding more than a fifth from its high in May. The FTSE 100 fell 13.7 per cent in the third quarter in its worst three-month performance since 2002.
Striking civil servants have blocked access to Greece’s statistical agency building in Athens since Tuesday, undermining efforts by Elstat, the statistics agency, to bring Greek figures in line with EU standards after years of fudging .
The so-called troika – the European Commission, the European Central Bank and the IMF – are in Athens to inspect the budget figures before deciding whether to release the next €8bn ($10.9bn) tranche of its current bail-out loan.
"We will miss [Friday’s] deadline for sending final debt and deficit figures for 2010 to Eurostat, the Commission and the troika, because I and my team can’t get into the building," Andreas Georgiou, chairman of the Elstat statistics agency, told the Financial Times. "These detailed figures are urgently needed for the troika to recalibrate the draft budget, if required, before it goes to parliament on Monday."
Mr Georgiou, a former IMF official, was hired by the government last year with a brief to set up an independent statistical agency. He said members of the agency’s board have tried to undermine EU-mandated work practices. One former board member faces a criminal investigation for allegedly hacking into Mr Georgiou’s work computer.
Striking civil servants blockaded government ministries on Friday, including the headquarters of the finance, transport and health ministries, in order to prevent troika officials from collecting data needed for the current review.
Speaking after a meeting in Paris with George Papandreou, Greece’s prime minister, French president Nicolas Sarkozy said the Lehman collapse had plunged the world into economic crisis but Europe would not allow the same thing to happen. "The failure of Greece would be the failure of all Europe," Mr Sarkozy said. "It is not possible to let Greece fall for moral and economic reasons."
As the eurozone crisis gathered pace in the third quarter, the dollar rallied against all but two of the 31 largest currencies as investors fled riskier assets and piled into US treasuries and other havens. Emerging markets provided no succour. Fearing a rerun of the mayhem that followed the Lehman collapse, investors have withdrawn almost $6bn from emerging market bond and stock funds over the past week.
Hong Kong’s stock market suffered its biggest quarterly loss in a decade, and borrowing costs for emerging market governments and companies hit a one-year high on Monday.
Bankers and economists expect the last three months of the year to be bumpy as well, with much depending on the outcome of Greece’s sovereign debt negotiations. "It all boils down to what happens on the policy front," said Mark Bamford, head of global fixed income syndicate at Barclays Capital. "There are major issues still to be resolved on both sides of the Atlantic."
Greek Banks Face Nationalisation if Haircut Too Severe
by George Georgiopoulos - Reuters
Some of the biggest of Greece's debt-laden banks may be headed for nationalisation, particularly if debt restructuring becomes more aggressive and investors continue to dump their shares.
Hostage to about 40 billion euros (34 billion pounds) of toxic government debt on their books in the form of deeply discounted bonds, their fate is inextricably tied to the outcome of the crisis, which many analysts feel will end with a Greek default. Private creditors, including Greek banks, have agreed to take a 21 percent "haircut" -- a loss on the face value of the debt they hold -- as part of a second, 109 billion euro bailout deal agreed by Greece and its international lenders in July.
But a consensus is building among economists, politicians, and investors that without a bigger, 50 percent haircut, Greece will still stumble under its 350 billion euro debt load and lose its emergency funding. "The prospect of a larger haircut has got bigger. Certainly the CDS market sees a larger than 90 percent probability of such an event happening within 5 years," said analyst Niall O'Connor at Credit Suisse in London. "It is possible and could happen within a year, I would not rule it out."
On Tuesday, German and French government advisers joined the debate, arguing that Athens needs to halve its debt burden and calling for more support to recapitalise banks with large exposures to Greek bonds.
Greek media reported on Wednesday that the discussion over the size of bondholder losses has pushed more investors into agreeing to the 21 percent haircut in which they would swap bonds maturing up to 2020 with safer, longer-maturities.
Bankers have also suggested they would be open to another round of write offs later if the first amount is insufficient to stop a default that would trigger much deeper losses. If that speculation becomes reality, the impact on banks' equity base would be too big to repair in a depressed market and lenders would have to turn to a state Financial Stability Fund -- and nationalisation -- or collapse.
"The banks would (need to) be immediately recapitalised and obviously nationalised because the owners would not be able to supplement the capital gap," said Yannis Papantoniou, a former Greek finance minister and the architect of the Mediterranean state's entry into the euro. "So the state should come in."
Battered by shrinking deposits and rising bad loans amid a deep and protracted recession, banks are deleveraging and cutting costs to shield their balance sheets and meet the 10 percent minimum core capital ratio demanded by the central bank.
The big five banks -- National Bank, Eurobank, Alpha, Piraeus and Hellenic Postbank have already taken a 4.3 billion euro hit on the debt swap plan that Athens wants to conclude next month. Greek bank shares have shed 64 percent year-to-date and 72 percent in the last 12 months. Once the Athens bourse's locomotives, they have sharply underperformed the broader market.
For the big five, the implosion in market value in the last 12 months was 10.7 billion euros, almost 5 percent of GDP, an amount that would only grow if banks turned to the FSF for funds. "The money to be raised would be multiples of their current market cap, rendering equity issues highly dilutive, vaporising shareholder ownership," said an Athens based analyst on condition of anonymity due to the sensitivity of the issue. "Given the size of the needed equity injections, the most likely outcome would be to turn to the FSF."
The FSF already has 10 billion euros to recapitalise and largely nationalise the Greek banking system. That amount should grow to 30 billion once euro zone parliaments ratify the EFSF safety net created to prevent the Greek crisis from spilling over into other countries like Spain or Italy and triggering a new global economic downturn.
Under the scheme, banks would issue common voting shares, which the FSF would buy, giving the state large equity stakes in the banks. It would buy the shares far below market prices so taxpayers stand a chance to make a capital gain when the economy returns to growth and the government can privatise the stakes.
Such a model would resemble the TARP plan executed by U.S. policymakers following the collapse of Lehman Brothers in 2008 and the nationalisation of two of Sweden's top banks in the early 1990s, long cited by economists as one of the most successful bank rescue operations in modern history.
But while in both of those cases governments managed to divest their shares and return their banking sectors to health, economists warn Greece has suffered a far deeper economic contraction, while the state has also proven a poor steward of sectors that traditionally thrive under private ownership. "This of course would be a negative thing, because state-owned banks in a country like Greece would be a disaster in terms of management, financing, and everything else," Papantoniou said.
An obvious parallel is Ireland. After a series of bailouts, two of the six domestic banks were closed and the government forced mergers and balance sheet cuts, leaving two banks virtually state-owned and only Bank of Ireland in majority private hands.
Core Capital Hit
Greek banks have been losing deposits since the debt crisis erupted in the start of 2010 due to outflows and recession-driven cash burn. Business and household balances had shrunk by 50.3 billion euros, or 21.2 percent, to 187 billion by July. If Greek banks were to take a 50 percent haircut on 40 billion euros of government paper, it would mean an after-tax writedown of about 16 billion euros.
Subtracting this writedown from an aggregate Core Tier 1 capital -- a measure of banks' financial strength -- of about 24 billion for the big five banks would leave them with just 8 billion euros in equity. Analysts say that, measured against 200 billion of risk weighted assets, the remaining equity would translate to a capital ratio of just 4 percent, far below the 10 percent minimum required by the central bank.
To claw their way back to the minimum ratio, banks would need to raise at least 12 billion euros when the combined market capitalisation for the big five is only 4.3 billion euros, a near impossible prospect in such a troubled market. While in theory some banks could generate capital through deleveraging and asset disposals, analysts say this would be a long shot given the time pressure to restore their financial strength and reassure depositors.
While underwriting rights issues would be a tough call, finding a deep-pocketed willing investor cannot be entirely ruled out. Alpha and Eurobank unveiled a merger deal in August that included a capital injection by Alpha's Qatari shareholder Paramount, which will pump in half a billion euros through a convertible bond issue.
But analysts said the prospect of buyouts from foreign peers looks dim as long as sovereign debt default fears persist. Potential investors looking for cheap prey would probably wait until Greece's economy stabilises and cherry pick from the FSF, which will be looking to divest stakes in two years' time.
"It is highly unlikely that a foreign bank would come in and inject capital in a Greek bank as long as the risk of default is so alive," said Deutsche Bank analyst Dimitris Giannoulis. "The FSF remains the only option for banks," he said.
Troika report key to rethinking Greek haircut: officials
by Jan Strupczewski - Reuters
The next international inspectors' report on Greece's progress toward its fiscal targets will play a crucial part in any re-examination of private sector involvement in the second bailout package for Athens, euro zone officials said.
The report from the International Monetary Fund, the European Central Bank and the European Commission -- the 'Troika' of lenders -- could be ready in 2-3 weeks. It will show if Greece met conditions for the next 8 billion euro tranche of aid under the existing loan plan, without which it will default next month.
Officials said that if Greek growth forecasts in the report were revised down, Greek revenue projections would be cut too. As a result, Greek financing needs would be bigger than foreseen on July 21, when EU leaders agreed on a 109 billion euros new bailout framework from public funds, on top of a private creditor contribution via a bond exchange which would inflict 21 percent losses.
"The framework conditions might have changed since the last review was done and the Greek growth forecast also," one euro zone official said. "When we put all of that together we have to see what kind of conclusions will be drawn."
Officials said if faced with higher financing needs, euro zone governments would be unlikely to agree to shoulder the extra burden alone and could ask private Greek bond holders to contribute more than the already agreed 21 percent haircut. "This is a discussion that is taking place," a second euro zone official said.
Greek Finance Minister Evangelos Venizelos was reported last Friday as telling lawmakers he saw three scenarios to resolve the debt crisis, including one involving an orderly default with a 50 percent haircut for bond holders.
"Nobody knows how much bigger the involvement could be. It could come much closer to the market rate possibly. There has been talk about 50 percent, but that does not mean anything," the second official said. "The issue is whether the current approach leads to a viable solution or not. Currently there is no definite view on that -- it is for the Commission, IMF and ECB to say whether it is possible or not possible," the official said.
Slower Greek Growth, Bigger Financing Needs
The "troika" inspectors forecast in early June that the Greek economy would contract 3.8 percent in 2011 but grow 0.6 percent in 2012 and 2.1 percent in 2013. But Venizelos told the Greek parliament on September 15 that Greece would remain in recession for a fourth year in 2012.
"If the troika says that Greece will not return to growth until 2013 or 2014, the assumptions of the second bailout from July will have changed," a third euro zone source said. "The additional funding needs can either be shouldered by the governments, which is politically very difficult, or shared with the private sector," the official said. The publication of the "Troika" report is likely to coincide with the completion of the ratification process of new operational powers for the euro zone bailout fund, the European Financial Stability Facility (EFSF).
Once Slovakia approves it, something it has pledged to do before October 17, the 440 billion euro EFSF will be able to extend precautionary credit to governments under market pressure like Spain or Italy, buy their bonds on the market and lend to governments to recapitalize banks. With such instruments in place, the euro zone would be better equipped to handle potential contagion effects from a Greek technical default, to which a renegotiation of the private sector haircut would amount, officials said.
"The deeper haircut is a rating or credit event that would be selective default or default by the rating agencies," a fourth euro zone official said. "The July 21 agreement was carefully crafted to limit to the extent possible the potential duration of a ratings downgrade -- anything that goes beyond that entails different consequences in terms of a downgrade, but it does not mean that Greece will not pay its bills anymore," the official said.
No Big Decisions Before Late October
The last Troika report from June said "debt restructuring in Greece would have a severe contagion impact on other EU sovereigns."
The report said that countries with high, but not obviously excessive, debt levels could face a significant increase in risk perceptions by creditors, which could "tip the balance into illiquidity, even without a change in the underlying fiscal position of the countries concerned."
But officials said that since June the atmosphere has changed and many politicians were now openly talking about the possibility of a Greek default, previously taboo. "The benefits of the voluntary private sector involvement deal can be questioned when you look at the final figures -- if it makes sense from the governments' point of view," a fifth official said.
"Greece will get the sixth tranche of aid because nobody wants Greece to default in two weeks," the official said. "But then we might be in for some reopening of issues that were settled already in the summer, in October and possibly also in November," the official said.
"I don't have any high expectations for any of the upcoming meetings, not the Eurogroup on October3, not the Eurogroup on October 13 and the European Council on the 17th. I think the crunch time will be in end-October and November," the official said.
German bailout vote is 'too little, too late'
by Ambrose Evans-Pritchard - Telegraph
Germany's Bundestag has voted overwhelmingly to boost the scope of the EU's rescue fund but implicitly capped its firepower at €440bn, leaving it no clearer whether Europe has the means to halt debt contagion to Italy and Spain.
Chancellor Angela Merkel won her "own majority" for the bill, narrowly averting the collapse of her government, but only after pledging that there was no grand plan committing Germany to vast and unlimited liabilities.
Horst Seehofer, leader of Bavaria's Social Christians CSU, said his party would go "this far, and no further", insisting any expansion of the rescue machinery was out of the question. "The financial markets are beginning to ask whether Germans can afford all this help. We must not risk the creditworthiness of the German state," he said.
Norbert Lammert, the Bundestag's president, said lawmakers felt they had been "bounced" into backing far-reaching demands and warned that Germany's legislature would not give up its fiscal sovereignty to any EU body.
Finance minister Wolfgang Schäuble said reports of a secret plot to boost the guarantees of the fund (EFSF) were scurrilous. "It will not be raised. There can be no debate about this. These suspicions are indecent," he said, acknowledging only that the money will deployed as "efficiently as possible".
Officials in Berlin say Mr Schäuble has been careful not to rule out use of leverage. The finance ministry has no specific plan to lever the fund but is aware of six or seven options "floating about" – pushed by France and Brussels – that might offer a solution.
One variant would be to guarantee a 20pc slice of debt in countries needing help. This would allow the fund to lever up to €2 trillion, the tradeable public debt of Italy and Spain. This resembles the structure of US subprime debt securities. It could go horribly wrong if the crisis deepens.
Italy struggled to roll over debt on Thursday, paying 4.68pc for €3.1bn of three-year debt, up 81 basis points from last month. Rome announced plans to sell €30bn of state assets, mostly property. It may include €10bn of CO2 emission rights – a form of debt reshuffling to gain time.
Silvio Peruzzi from RBS said the rescue fund is too small to stabilize the eurozone, leaving the European Central Bank (ECB) with the unwelcome task of propping up the system "There is no choice. The ECB will have to keep buying bonds, moving ever closer to debt monetisation. If this firewall is removed, contagion will accelerate dramatically," he said. "We think the eurozone is falling into recession and this is a big risk. It will call into question the budget consolidations of Italy, Spain and even France."
The EU's index of economic sentiment fell sharply in September, following a collapse in August. Howard Archer from IHS Global Insight said the falls match declines after the Lehman crisis in late 2008. "It is clearly very worrying," he said. French president Nicolas Sarkozy hailed the vote as an "important step", calling on others to ratify the measures quickly. Slovakia will be last in mid-October.
Yet the package merely enacts the EU summit deal agreed in July, which empowers the EFSF to buy bonds pre-emptively and recapitalise banks. The landscape has changed radically since then as the global downturn plays havoc with debt trajectories.
The bond crisis spread to EMU's "soft core" in August, pushing Spanish and Italian 10-year yields above the danger level of 6pc. The ECB stepped into the breach and has been buying their debt ever since to stop the crisis spiralling out of control, despite bitter protests from the Bundesbank. This is politically untenable over time. Yet the revamped EFSF is not up the task either. "The EFSF in its current guise is too little, too late," said Suki Mann from Societe Generale.
China is unlikely to come to the rescue. Jin Liqun, head of China Investment Corporation, told an Economist forum that Beijing is worried about the "unravelling of the situation" in Europe. "China cannot be expected to buy into high risk in the eurozone without a clear picture of debt workouts. Sorry if I have ruffled feathers," he said.
Stefan Homburg, head of Germany's Institute for Public Finance, said the EMU crisis had already gone beyond the point of no return. "The euro is nearing its ugly end. A collapse of monetary union now appears unavoidable. The Chancellor should have no illusions about this," he said. "The eurozone's leaders and the ECB have breached all the stability rules, the debt ceiling, and the ban on bond purchases. This isn't the rule of law, it's the rule of the jungle," he said.
Meanwhile, the International Monetary Fund has approved an additional $675m under a standby arrangement for Romania. The IMF said Romanian authorities "have indicated that they will continue treating the arrangement as precautionary and therefore do not intend to draw under it".
France is in denial as fragile banks add to economic woes
by Angelique Chrisafis - Guardian
The second biggest economy in the eurozone is grappling with public debt, stalled growth and high unemployment
In her small fashion boutique in a village near Saint-Étienne, Valérie Dongrazi was feeling the pressure of French banking jitters and the economic rut.
The 44-year-old shopowner has not paid herself a salary for more than a year. When she did, it was €1,300 (£1,130) a month. She's had to start buying cheaper foreign stock as clients in her village in south-eastern France who once paid €270 for a good winter coat, can now afford just €150. To stay on top of overheads, she relies on going to her bank to increase costly overdrafts or ask for loans.
But with a big question mark over French banks' stability, shares in the biggest banks plummeting and talk of a state bailout, the lifeline of bank credit to businesses like Dongrazi's is drying up. French banks are nervous about lending money, companies are struggling and consumer confidence has fallen to the lowest level since February 2009, when France was suffering its worst recession since the second world war. "There's a mood of fear; people are not buying for pleasure, barely for necessity. I'm not optimistic," she said.
Rumours about the fragility of French banks and their ability to cope with losses from Greek debt has thrown a spotlight on the wider woes of the economy and its slippery hold on its triple-A rating. The shares of France's biggest banks have lost half of their value in just three months. In any other country, this might signal panic on the streets, but France believes it is battling bigger economic problems: spiralling public debt, stagnant growth, low business morale and high unemployment.
French banks continue to insist they do not need a state bailout and can withstand losses. Although big international firms have begun moving funds out of Paris banks, households are not rushing to withdraw savings. A Northern Rock-style bank run would be unlikely in France, where savings have high state protection. As one economist said, there is a notion that the state will "always step in" as protector. There is little chance of a major French bank going under because it has been made clear that the government could, within minutes, take the decision to recapitalise.
But the banking wobble has highlighted serious wider problems in the sluggish economy. Just as the omnipresent state offers a safety net for the banks, business lobbies say its suffocating grip on the country's financial workings are more of a problem than ever.
France didn't fall quite as low as Britain or Ireland in 2008 but – famous for red tape, regulation and high labour costs – it is still struggling to bounce back. The eurozone's second biggest economy failed to grow at all in the second quarter as consumer spending nosedived. "I think the seriousness of the banks' situation was exaggerated," said Marc Touati, economist at Paris-based Assya. "The real problem is growth. Unfortunately, a recession is approaching."
He sees the risk of a slowdown that could last into 2012. With no growth, there would be higher unemployment and more public debt. Failure to rein in France's public deficit – one of Europe's highest – could threaten credibility abroad and social cohesion at home. "In France, even more than elsewhere, all this depends too much on politics and political decisions," he added.
With seven months until a presidential election, the role of politicians is crucial. The priority is to plug the hole in state coffers created by decades of the state living beyond its means. France has a vast social security deficit, as well as big holes in local authority and central government finances. The country hasn't balanced a budget since 1974.
Sarkozy, desperate not to be the president that loses France its triple A rating, has published belt-tightening budget proposals for 2012, to raise taxes. The government wants to stick to its target to cut the deficit to 3% of GDP in 2013. But, though it has cut its growth predictions to 1.75% for 2011 and 2012, economists fear growth will not be strong enough to generate the tax revenues the government is counting on.
Some politicians privately acknowledge that taking measures severe enough to correct the public deficit would mean "blood and tears" for the French. But few political figures on any side are prepared to announce such drastic measures while they are busy trying to get elected. Economists believe the government is merely trying to steady the ship, the country will have to wait until June 2012, after the presidential election, for a concrete economic action plan.
"What's the economic strategy for the next decade? I don't think anyone has a clue," said Alexander Law, chief economist at Xerfi. "There is an idea France will have to start copying Germany, be slightly less generous to households and more accommodating fiscally to companies. That hasn't seeped through into the political echelons; the 2012 budget is taxing everyone a bit more.
France's fiscal structure favours household consumption as opposed to investment. "Tax will move from companies towards consumers – people know that's going to happen, but they don't know when and how, or how unpopular it's going to be – ranging from very unpopular to horrendously unpopular," he said.
Jean-Guilhem Darré, of the SDI union for businesses with fewer than 20 staff, said the next six months would be hard. "We're not yet in the same state as in 2008, but we see the elements returning to have the same type of crisis as 2008."
Pierre Coinaud, who represents business leaders in the old industrial heartlands of the the central Limousin region and runs an office supplies firm with 80 employees, blames the overweening state. "State rules and regulations are so rigid it's difficult for firms to react quickly or adapt to economic realities," he said. "France's problem is that we don't export enough, we live in an internal market, kept afloat and helped along by the state. Now the state needs to tighten its belt and that will have an effect on the market. French businesses need more freedom, more air to breathe."
Sarkozy pledges to fast-track eurozone rescue as slump fears grow
by David Gow - Guardian.
French president Nicolas Sarkozy is to hold urgent talks in Germany with chancellor Angela Merkel on speeding up the rescue plan for the euro.
Sarkozy said on Friday the talks would take place within days as uncertainty about the eurozone's stability and worries about deepening recession returned to European markets. Declaring after talks with Greek premier George Papandreou that "a failure of Greece would be a failure for all of Europe", the French president praised Athens for its determination to meet its commitments and said: "There can be no question of dropping Greece."
His comments came as European leaders turned up the heat on Slovakia to approve the enhanced eurozone rescue fund amid growing fears it could yet scupper the scheme. Only a day after huge relief at Germany's decision to endorse the expanded bailout fund, anxiety stalked markets and the corridors of power as eurozone inflation rose to a three-year high of 3%, shares in French banks plunged as much as 10% and Denmark's central bank offered 400bn krone (£46bn) in emergency liquidity for the country's banks.
There was renewed talk of a Greek debt default and larger "haircuts" for private bondholders as Papandreou sought backing for a further €8bn (£6.8bn) lifeline to save his country's treasury from bankruptcy.
Sarkozy said: "There is a moral and economic obligation of solidarity with Greece." Papandreou in turn told reporters that his nation was making all the required sacrifices and reforms. "I wish to make it perfectly clear that Greece, I myself, our government, the Greek people, are determined to make the necessary changes."
Yet conflict sprang up anew over plans to set up an even bigger rescue fund for the eurozone, with leading European bankers demanding an outline agreement on a new scheme by the time G20 finance ministers meet in mid-October.
Austria brought some solace, becoming the 14th eurozone member to endorse enhanced powers for the €440bn European Financial Stability Facility when its parliament voted 117 to 53 to raise their country's contribution to €21.6bn. After the Bundestag voted overwhelmingly in favour on Thursday, Germany's second chamber, the Bundesrat, followed suit – leaving only Malta (next week), the Netherlands (on 6 October) and Slovakia to vote.
The first two are expected to endorse the enhanced EFSF even though the Dutch minority government will have to rely heavily on the opposition for support. But the coalition government of Slovakian premier Iveta Radicova – who has held private talks with Merkel on the issue – has been seeking concessions from its eurozone partners. One of the four parties in the coalition, the Freedom and Solidarity (SaS) party, is, according to varying reports, either digging in its heels, refusing to endorse the expanded EFSF, or moving closer to a compromise.
Opposition support is said to be uncertain. Radicova wants to secure the Slovak parliament's endorsement before she attends the next EU summit on 17 October, but her requests for concessions to help her win that backing have been rejected so far.
In Brussels, aides to Olli Rehn, the economic and monetary affairs commissioner, ruled out any changes to the 21 July package to enhance the EFSF. Asked by Slovak reporters if there was a Plan B, as Radicova could not deliver, they said: "There's no Plan B as Plan A was unanimously approved by all the 17 leaders in July as the vital tool to ensure financial stability in the euro area."
Reuters reported from Bratislava, the Slovak capital, that Maros Sefcovic, a European commissioner, had said: "I cannot imagine renegotiation of [EFSF] documents and agreements beyond what they agreed … after so many countries, including Germany, approved it."
A Slovak no vote might force eurozone leaders to conclude a new deal without Bratislava, or they could take on the country's €3.5bn contribution to the enhanced EFSF guarantees of €780bn and share it out among themselves. Alternatively, they could agree to shave those guarantees by a small amount. The uncertainty spilled over into markets worried that the surge in eurozone inflation to 3% could stop the European Central Bank cutting interest rates when it meets in Berlin next week.
The ECB meeting, the last of his eight-year term for its president, Jean-Claude Trichet, is expected to reverse the two rate increases it imposed this year, amid widespread criticism that its erroneous judgment had simply deepened the prospects of renewed recession. The bank is now thought more likely to continue to offer more liquidity to eurozone banks, which are terrified by the merest hint of a Greek default.
As German coalition ministers continued to fall out over "leveraging up" the EFSF, it was being said in banking circles that the key response would be to get the ECB to endorse proposals to turn the facility into an insurance scheme for providing first-loss guarantees. Wilbur Ross, the private equity billionaire, told Bloomberg TV: "I not convinced that this bailout package is going to be remotely enough … I think it should start with a T [for trillion], not a B [for billion]."
Bank of America debit card fee plan met with resistance and anger
by Joe Rauch - Reuters
Wells Fargo and Chase also considering $5-per-month fee, which US senator Richard Durbin calls 'overt and unfair'
Bank of America plans to charge customers who use their debit cards to make purchases a $5 monthly fee beginning early next year, joining other banks scrambling for new sources of revenue. US banks have been looking for ways to increase revenue as regulations introduced since the financial crisis limited the use of overdraft and other fees.
The Dodd-Frank Act's Durbin amendment, due to go into effect on 1 October, caps fees banks can charge merchants for processing debit card transactions at 21¢ per transaction from an average of 44¢, potentially costing banks billions of dollars. Banks also face broader operational challenges as low interest rates and higher capital requirements hit profitability, and the sluggish economy depresses loan demand.
Other large US banks including Wells Fargo, Chase and SunTrust are testing or planning monthly debit card fees. "The economics of offering a debit card have changed," Bank of America spokeswoman Anne Pace said on Thursday. Bank of America is the largest US bank by assets.
Senator Richard Durbin, the architect of debit card interchange fee reform, bashed the proposed monthly fee. "Bank of America is trying to find new ways to pad their profits by sticking it to its customers," he said in a statement. "It's overt, unfair, and I hope their customers have the final say."
Even before introduction of the Durbin amendment's rules on debit fees, Bank of America's fee income was dropping at its deposits and card services units. The bank's deposits unit reported fee income of $1bn in the second quarter of 2011, down 34% from $1.5bn a year before. Card services, which includes the bank's credit and debit card operations, reported fee income of $1.9bn, down 23% from $2.5bn in second quarter 2010.
"This might be a fee too far," said Ed Mierzwinski, director of the consumer program for the US PIRG, a federation of state public interest research groups. Mierzwinski said such fees could push customers to smaller banks that have not introduced checking and debit-related fees.
Pace said customers expect certain features for their accounts, like overdraft and fraud protection, and the fee would offset some of those costs. The fee will be waived for the bank's premium or platinum privileges accounts tied to its Merrill Lynch brokerage. It will also not be charged for using the card to access the bank's ATMs, Pace said. She declined to say how much the bank expects to earn through these fees or how many customers would be affected.
Some banks have pushed back against debit fees. Citigroup said earlier this month that it would not impose debit card usage fees as part of a broader account restructuring. The head of banking products for Citi's US consumer bank said customers had told the bank that a debit card fee would be "a huge source of irritation."
BofA, Wells Fargo, Citigroup Left TARP Early To Avoid Restrictions On Executive Pay, Report Finds
by Alexander Eichler - Huffington Post
In the wake of the financial crisis, a number of the nation's largest banks were excused from the government's rescue program before they had returned to a position of complete financial security -- in part because they wanted to avoid restrictions on how much their executives would get paid, according to a new report from the program's government overseer.
Citigroup, Wells Fargo, PNC and Bank of America successfully lobbied to leave the federal bailout program early in 2009, even though the Federal Reserve Board and the Federal Deposit Insurance Corporation had recommended they take additional steps to shore up their assets, according to a new report from the Special Inspector General for the Troubled Relief Asset Program, a government watchdog office.
Regulators, including the Treasury and the Federal Reserve Board, eventually "relaxed" their criteria for letting the banks out of the program, the report says, leaving questions about whether the banks had strengthened their holdings enough to be able to withstand another systemic crisis.
"Ultimately, the federal banking regulators ended up bowing to pressure" to let the banks leave early, said Christy Romero, Acting Special Inspector General for TARP and the author of the report. Romero added that in the event of another shock, many banks could be left with too little capital to endure, raising the possibility that "it could potentially trigger and avalanche of severe consequences to the broader economy."
SIGTARP's findings do little to change widespread impressions that the government's Wall Street rescue handed out billions of dollars in taxpayer funds without extracting lasting change in return, with many institutions able to continue operating much as they had before the crisis.
The new report shows how several major banks were allowed to exit the program by paying back their government loans even before they had returned to full health. According to SIGTARP, in 2009, these four banks repeatedly tried to leave the bailout program, also known as TARP, ahead of schedule, claiming that the stigma attached to the bailout would damage investor confidence in their stability.
Bank of America was especially persistent, submitting 11 separate exit proposals to the Federal Reserve Board in less than a month. The banks, particularly Citigroup and Bank of America, also expressed concern that if they stayed in TARP, they would be subject to the program's restrictions on executive compensation.
Romero told The Huffington Post that the matter of executive payment was "a recurring theme" throughout the banks' requests to exit the program. Once it was clear that these banks wanted to leave TARP sooner rather than later, the Federal Reserve undertook stress tests to determine how much capital the banks would need to have on hand in the event of another emergency, and issued recommendations for how the banks could raise the money.
However, each of the banks ended up negotiating different terms for their exits, and between December 2009 and February 2010, all four banks were allowed to repay their bailout funds and leave TARP, even though doubts remained about whether they'd taken sufficient steps to secure a big enough safety cushion of capital. In the end, the process by which these banks exited TARP was "ad hoc and inconsistent," the report says.
As a result of this lenience, Romero told The Huffington Post, the financial system is still carrying considerable systemic risk from huge, interconnected banks, well after the meltdown of 2008. "The institutions that were 'too big to fail' ... are bigger than they were before," said Romero. "It's very critical that regulators remain vigilant to banks' demands to relax capital requirements."
California Pulls Out of Foreclosure Talks
by Ruth Simon and Nick Timiraos - Wall Street Journal
Move Is Serious Blow to Federal and State Effort to Reach $25 Billion Deal With Banks Over Questionable Practices
California Attorney General Kamala D. Harris pulled out of settlement negotiations with the nation's biggest banks over alleged foreclosure abuses, calling the proposed deal "inadequate for California homeowners." The decision by Ms. Harris delivers a serious blow to efforts by the Obama administration and 50 state attorneys general to forge a $25 billion settlement with the nation's largest banks over "robo-signing" and other questionable foreclosure practices.
Her actions follow the withdrawal of New York from the talks. Without the participation of California and New York in the negotiations, banks will be far less likely to agree to the multibillion dollar settlement that federal and state officials have spent months pursuing.
California remained a critical constituent for any deal because it has more borrowers who are underwater, or owe more than their homes are worth, than any other state. California also has more borrowers that are behind on their mortgages or in foreclosure than any other state but Florida.
The move by Ms. Harris, who took office in January, comes after 11 months of often-frustrating negotiations between big banks such as Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. Representatives for the three banks declined to comment. A spokeswoman for Ally Financial Inc., the fifth-largest mortgage servicer and parent of GMAC Mortgage, called the decision "disappointing for borrowers in California" who are in financial distress.
One key point of contention has been the extent to which banks should be released from additional legal claims involving the mortgage crisis in exchange for signing onto the foreclosure settlement. In recent months, other states, including Delaware, Massachusetts, Nevada, Minnesota and Kentucky, have also expressed concerns over the scope of any settlement. Some states and critics of the banks argue that officials haven't done a thorough investigation of other potential improprieties.
In a letter sent Friday to Associate U.S. Attorney General Thomas Perrelli and Iowa Attorney General Tom Miller, who have been leading the negotiations, Ms. Harris said her decision to break off from the group was driven in part by those two key concerns. "It became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated," she said.
She added that "the relief contemplated would allow too few California homeowners to stay in their homes." Ms. Harris also cited a recent "troubling surge in foreclosures," which had plummeted in the wake of the robo-signing scandal. In a statement, Mr. Miller called California "an important part of our team" but said that the states "fully expect to reach a settlement with the banks." A Justice Department spokeswoman said that discussions would continue "to ensure that the banks are held fully accountable for their actions."
The split highlights a broader disagreement between some government officials involved in the negotiations. The Obama administration has argued that a settlement could help provide immediate benefits to borrowers, while creating certainty for the housing market. "We are 100% focused on providing relief to homeowners while it can still make a difference and save homes from foreclosure," said Mr. Miller. "Providing relief after the foreclosure crisis is over would be a hollow victory indeed."
Friday's decision by California wasn't completely unexpected. As the talks have dragged on, political pressures have mounted, with both sides expressing unhappiness with any deal. Conservatives denounced the settlement as a "shakedown" of banks, while labor unions and liberal political groups warned of a bank giveaway.
Ms. Harris and other Democratic state attorneys general have faced intense lobbying from different factions, including critics who want the states to hold out for a bigger deal and the Obama administration, which has shepherded the deal. A spokesman for Ms. Harris said the attorney general made her decision based on "the evidence and the merits of the deal, not other considerations."
The loss of California dims the Obama administration's push to force banks to write down loan balances as part of any settlement. Even if the remaining states and federal agencies reach a deal, it is likely to cover far fewer borrowers as the price tag drops. The settlement talks were prompted by so-called robo-signing, where bank employees signed off on hundreds of loans a day and falsely claimed they had personally reviewed documents to give the bank the right to foreclose.
The mess deepened as judges raised questions about how banks documented their ownership of loans and whether financial firms fabricated other paperwork. Regulators have found what they said are widespread weaknesses in mortgage-servicing operations. Over the past year, banks have sharply slowed down foreclosures. Foreclosure delays have been most pronounced in "judicial" states where banks must foreclose on borrowers by going before a court. California allows foreclosures through a non-judicial process.
Regulators and banks say they have uncovered very few cases where borrowers entered foreclosure without missing payments. But the crisis has exposed numerous cases where banks couldn't prove they had the right to take back homes or where borrowers believed they were receiving loan modifications, only to lose their home. The unraveling of any settlement also raises the prospect that banks will face separate legal action from a handful of state attorneys general.
Ms. Harris traveled to Washington last week for a meeting with banks and state negotiators in an effort to resolve her concerns. She said that her office will continue to investigate questionable mortgage practices and will push for additional legislative and regulatory reforms. This year, she announced the creation of a "mortgage fraud strike force" to study all stages of mortgage lending, from origination to the servicing of troubled loans to the packaging of loans into securities.
China ruffles Europe's feathers
by Ambrose Evans-Pritchard - Telegraph
I have just come from The Economist’s forum on High Growth Markets (ie BRICS +) at The Connaught. For those still expecting China to rescue Europe – a region with a per capita income nine times as high, with debts to match – the head of the country’s sovereign wealth fund could hardly have been clearer.
"We in China are concerned about the unravelling of the situation in the region," Jin Liqun, chairman of China Investment Corporation – which has $300bn to play with. "China cannot be expected to buy into high risk in eurozone without a clear picture of debt work-out programmes." "Sorry if I have ruffled feathers," he said, not looking remotely sorry.
"Over time, economies in the EU will be out of woods. We’re optimistic for the outlook," he allowed. However, nothing can be achieve unless EMU states secure the popular consent of their citizens for austerity policies.
Mr Jin, a graduate of Boston University, said there are two big risks in China that "have to be taken seriously":
- The $1.7 trillion debts of the local government finance vehicles. Half of this is concentrated along the Eastern seaboard in the so-called G7 provinces. Roughly 10pc of the debt is bad. However, most of the credit went into infrastructure projects that will generate money.
- The real estate "bubble" , as he called it. This can be managed provided there is no further build-up in debt leverage. First time buyers must put down 60pc in equity, mitigating excess. The wild extremes so widely reported in the media are an "insignificant part of the market".
- Risk three is of a different kind. China is "quickly losing competitiveness" as labour costs shoot up. The surrounding countries in Asia are starting to eat China’s lunch. The only option for China is to move up the technology ladder. Just thought I would pass it along.
Now on to Germany where Angela Merkel has just secured an "own majority" from her coalition for the revamped bail-out fund (EFSF), and saved her career.
All we need next is a fresh vote to boost the fund from €440bn to €2 trillion, the sum needed to prevent contagion to Italy and Spain. Today's vote solves nothing.
Denmark gives banks $72.6 billion lifeline
by Clare MacCarthy - FT
Denmark’s central bank on Friday threw a lifeline to the country’s myriad small struggling banks and businesses saying it would provide as much as DKr400bn ($72.6bn) in emergency liquidity.
"The expansion of credit facilities is intended to supplement the banks’ access to raise loans, thereby easing the transition to a situation without government guarantees when these guarantees expire in 2012 and 2013," said Nils Bernstein, governor of the central bank.
In essence, Nationalbanken’s move extends a fresh line of credit to small banks that could have faced bankruptcy with the expiry next year and in 2013 of earlier emergency measures.
In a significant departure from the existing benchmark on acceptable collateral, the central bank will expand the collateral basis from government and mortgage bonds to include the banks’ own credit claims.
Such claims, the central bank said, must be "simple loans and agreed overdrafts in kroner or euro". Implicated debtors must be non-financial corporations, public authorities or households, it added. An additional requirement is that debtors whose borrowings are used as collateral must be legally resident in Denmark.
Despite the central bank’s assurances that this new collateral class would be subject to rigorous audit and inspections, local market pundits sounded a cautious note. "The use of the banks’ own loans introduces an element of uncertainty because it will be up to the banks themselves to judge which loans are sound," said Jacob Graven, chief analyst at Denmark’s Sydbank. "But on balance this is probably a good step at the right moment. Not taking action could have had very severe consequences," he added.
The central bank’s move was applauded by bodies representing small enterprises and farmers who have been struggling with a liquidity squeeze caused by a harsh borrowing environment for provincial Danish banks. The credit noose tightened this year after two small banks failed and senior creditors suffered losses. The implicit risk of further failures made markets reluctant to provide funds to peripheral Danish banks.
The central bank’s new six-month credit facility will run parallel to its existing seven-day facility, and will track the benchmark lending rate which is at 1.55 per cent. While such a low interest rate would be attractive to distressed banks, local pundits said on Friday that larger and healthier banks would be unlikely to take advantage of the facility as they could borrow elsewhere.
Italy looks to historic property for funds
by Guy Dinmore - FT
A chapter in the rich shipping history of Venice is drawing to a close as the state puts a "for sale" notice on a grand, neo-gothic palace overlooking the Giudecca canal. The four-storey Palazzo Molin, founded in the 16th century and complete with its own gardens, threw open its doors on Friday to prospective buyers for the offices of a state-owned shipping company that is to be sold off, Murano chandeliers and all.
Market conditions for the auction are far from ideal, but the sale is being closely watched as Silvio Berlusconi’s government considers radical steps to slash Italy’s debt mountain of more than €1,900bn. Even if Palazzo Molin manages to bring in €10m to €15m, the sum is still a drop in the lagoon for the debt-strapped country.
Launching their "Manifesto to Save Italy" on Friday, an alliance of private industry, banks and insurers presented the government in Rome with a list of reform proposals which included "massive disinvestment in the still huge real estate wealth" of the state.
Rather than selling property outright, Giulio Tremonti, finance minister, has proposed that investors back a state property "fund of funds", managed by the Treasury with oversight from the Bank of Italy, that would seek long-term income from sales, leases and concessions.
An official tally of centrally and locally owned government real estate has estimated their value at €425bn, of which €25bn to €30bn have been identified as possible candidates for the fund, with January 2012 set as a potential launch date. Individual properties were not identified.
Fund managers, however, said they saw in the proposal a government struggling to regain the credibility it has lost on debt and equity markets over the past three months. Corruption scandals and internal divisions cast doubt over whether Mr Berlusconi’s centre-right coalition can struggle on long enough to implement the reforms it has been promising for years but failed to deliver.
On the canal-side beneath the Palazzo Molin, the autumn sunshine is warming the marble of the impressive façade, added in the 18th century, as prospective buyers and their agents enter for the sales presentation. "Palazzo Molin is prestigious, historic and presents an unusual opportunity," says Vincenzo Pellegrini, head of Numerica SGR, a property fund specialising in northern Italy and which is not planning to bid.
Unlike previous failed attempts to sell off historic properties, such as a former army barracks in central Bologna, Palazzo Molin comes with no binding conditions. As long as the façade and gardens are preserved, a future owner is free to convert its 3,100 square metres into a hotel, divide the building into apartments or keep it as one grand residence.
Right outside a quay on the Giudecca canal, a main shipping lane, can take a superyacht – Hollywood star Angelina Jolie is said to have moored her vessel there recently. The palace also backs on to the narrow Rio Ognissanti canal with its own spot for a more modest vessel.
Originally part of the Adriatica shipping company, set up by the Fascist regime in 1937 as a demonstration of Italy’s maritime prowess, the palace served as a setting off point for cargo, postal and passenger ships heading to Cyprus, Egypt and other points across the Mediterranean. Up until 1974 the ground floor was still used as check-in and waiting room, next door to the offices of the Venice port captain and the French consulate.
Its future owner will savour the history alluded to in the architecture of the palace. Of more immediate significance for Silvio Berlusconi’s government is the signal the sale will send to a country hunting for revenue with which to placate the markets.
New Zealand’s credit rating downgraded by 2 of 3 major ratings agencies
New Zealand’s credit rating has been downgraded by two of the three major ratings agencies amid increased global concern over high debt burdens in developed nations. Fitch and Standard & Poor’s on Friday downgraded New Zealand from an AA+ rating to AA.
In the past, New Zealand has enjoyed strong sovereign credit ratings due to relatively low levels of government borrowing that offset worries about the country’s high private debt. But the ratings agencies have become less sanguine after an earthquake and weak economic growth strained the government’s finances.
The agencies are taking a harder line on any form of debt in the wake of the global financial crisis. Countries such as Ireland, which was forced to bail out banks after the global recession, have demonstrated how private debt can easily become a problem for the government.
The downgrade weighed on the New Zealand dollar. It was trading late Friday at $0.7639, down from $0.77 the previous day. It was worth as much as $0.88 two months ago. In its review, Fitch said New Zealand’s high level of external debt is "an outlier" among comparable developed nations, a situation which is likely to continue given that the current account deficit is projected to increase. A current account deficit typically shows that a country is spending more than it earns and relying on borrowing to make up the gap.
Standard & Poor’s cited increased spending by the government following February’s earthquake that killed 181 people and devastated the center of Christchurch, New Zealand’s second biggest city. According to S&P, negative factors include the country’s high levels of household and agricultural debt, its reliance on commodities for income, and an aging population. "Rising savings will be an important component for keeping the country’s current account deficit in check," said S&P analyst Kyran Curry.
New Zealand has a poor track record of personal savings, something that recent governments have attempted to address with a voluntary retirement contribution scheme called KiwiSaver. The latest downgrade will likely increase pressure on the government to make the scheme compulsory.
New Zealand’s finance minister Bill English defended the country’s economic performance. In a statement, he said the government has been attempting to reduce foreign debt, which remains the country’s "biggest economic vulnerability." "New Zealand’s private savings have started to increase and as a result we have started to reduce our total external debt," English said. "But it still remains high."
International liabilities have decreased from 86 percent of GDP two years ago to 70 percent of GDP in the year ending June, according to English. In its review, Fitch pointed to some positive features of the New Zealand economy, which it listed as moderate public debt, fiscal prudence, and strong public institutions. New Zealand remains rated AAA by the third major rating agency, Moody’s.