The views expressed in this blog may not always be accurate.
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2010년 12월 15일 수요일
Spain Aa1 Rating Put on Review by Moody's on Eve of Bond Sale
(This posting is entirely from Bloomberg on Dec.15, 2010)
Spain’s credit rating may be cut from Aa1, Moody’s Investors Service said, as the government prepares its final bond sale of the year tomorrow amid concern it may follow Greece and Ireland in seeking a bailout.
Spain has to raise 170 billion euros ($226 billion) next year, while refinancing needs for its regions total 30 billion euros and for banks around 90 billion euros, Moody’s estimates.
The rating will probably remain in the “Aa” range, Moody’s said. The company doesn’t see a bailout as “likely,” even though it “can’t rule it out,” Muehlbronner said.
Also weighing on Spanish debt are plans to make private investors contribute to the costs of future debt crises after 2013. German Chancellor Angela Merkel said today ahead of a European summit that “strict conditions” will be tied to future aid and any help will be “a last resort.”
Banks’ Needs
Moody’s said Spanish lenders may need 25 billion euros for recapitalizations, of which 10.5 billion euros has already been provided by the state’s FROB bank-rescue fund. In a more stressed scenario, that could rise to as much as 90 billion euros, the company said. The FROB was created with an initial 9 billion euros and has the capacity to take on as much as 90 billion euros of debt. Ireland will spend as much as 83 billion euros, more than half its gross domestic product, rescuing its lenders, according to the government.
“Given the nervousness of the markets, given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain,” Muehlbronner said in a telephone interview. If Spanish lenders had to be similarly capitalized, to “retain market confidence and absorb potentially higher loan losses,” the figure would be 80 billion euros to 90 billion euros, she said.
‘Relatively Poor’
Spain’s credit rating may be cut from Aa1, Moody’s Investors Service said, as the government prepares its final bond sale of the year tomorrow amid concern it may follow Greece and Ireland in seeking a bailout.
Spain has to raise 170 billion euros ($226 billion) next year, while refinancing needs for its regions total 30 billion euros and for banks around 90 billion euros, Moody’s estimates.
“Spain’s substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress,” Kathrin Muehlbronner, an analyst at Moody’s, said in a report today.
Spain lost its top rating at Moody’s in September as euro- region leaders struggled to contain the debt crisis. Spain is raising taxes, slashing wages and privatizing state industries to persuade investors it can avoid a rescue. Ireland last month became the second euro nation to get a bailout. The rating will probably remain in the “Aa” range, Moody’s said. The company doesn’t see a bailout as “likely,” even though it “can’t rule it out,” Muehlbronner said.
The euro fell and the extra yield that investors demand to hold Spanish 10-year bonds over German bunds widened to as much as 257 basis points after the Moody’s report, less than 30 basis points shy of a euro-era closing record. The spread eased to 250 basis points at 12:30 p.m. in London.
Bond Auction The move may further increase Spain’s financing costs at tomorrow’s bond sale, when the Treasury plans to auction 3 billion euros of 10- and 15-year securities. Surging yields already prompted the Treasury to reduce planned proceeds from the usual target of around 4 billion euros, Finance Minister Elena Salgado said Nov. 26. Portugal’s borrowing costs almost doubled at a sale of three-month bills today compared with the last auction in November.
“The news is another negative for Spain, and only makes tomorrow’s Spanish bond auctions even more tricky,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “Spain is already struggling to convince market participants that the country can put its own house in order by itself.”
Regional Borrowing Spanish Deputy Finance Minister Jose Manuel Campa said he doesn’t foresee any lack of demand for Spanish sovereign debt next year nor does he expect private issuers to have problems raising financing. Moody’s analysis of the regional governments’ finances isn’t “sufficiently careful,” he told reporters in Madrid today, as those administrations are meeting their budget targets and will continue to do so next year.
Spain, reeling from the collapse of a debt-fueled housing boom, has the highest unemployment rate in Europe at more than 20 percent. The budget deficit, which at 11 percent of gross domestic product last year was the third-biggest in the euro region. Its borrowing costs have surged and the gap between its 10-year yields and those of Germany are 17 times the average in the first decade of monetary union. Also weighing on Spanish debt are plans to make private investors contribute to the costs of future debt crises after 2013. German Chancellor Angela Merkel said today ahead of a European summit that “strict conditions” will be tied to future aid and any help will be “a last resort.”
Banks’ Needs
Moody’s said Spanish lenders may need 25 billion euros for recapitalizations, of which 10.5 billion euros has already been provided by the state’s FROB bank-rescue fund. In a more stressed scenario, that could rise to as much as 90 billion euros, the company said. The FROB was created with an initial 9 billion euros and has the capacity to take on as much as 90 billion euros of debt. Ireland will spend as much as 83 billion euros, more than half its gross domestic product, rescuing its lenders, according to the government.
“Given the nervousness of the markets, given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain,” Muehlbronner said in a telephone interview. If Spanish lenders had to be similarly capitalized, to “retain market confidence and absorb potentially higher loan losses,” the figure would be 80 billion euros to 90 billion euros, she said.
‘Relatively Poor’
Moody’s said it’s confident the government is committed to cutting the budget deficit and expects the shortfall to be close to 6 percent of GDP in 2011, compared with 11 percent in 2009. Still, Muehlbronner said the regional governments have a “relatively poor” track record on budget cutting.
The ratings company lowered Spain to Aa1 from Aaa in September. Spain lost its top grade at Fitch Ratings in May and at Standard & Poor’s in January 2009. S&P currently rates Spain AA while Fitch has a AA+ grade. Moody’s said that Spain’s position is “much stronger” than “other stressed euro-zone countries.” A one step cut to Aa2 by Moody’s would leave Spain in line with Italy’s rating and two notches above Portugal. To contact the reporters on this story: Paul Tobin in Madrid at ptobin@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
2010년 12월 14일 화요일
Brace for Yourself. We Have a Bigger Problem Ahead in 2011
Since last year, we've witnessed what was once touted as an examplary economic states such as Iceland and Ireland fall precipitously. The economies were booming with hot monies coming from foreign carry traders that credits were very easy to come by. This led to asset bubbles and the delusional wealth effect that encouraged people to buy imported big ticket items. Then before you know it, foreign investors were demanding their money back.. It was just a matter of time. And I think China has learned the lesson from Japan and these two countries. Unfortunately, the European problem is much more than these two states. The diagram below shows you that in 2011, these PIIGS have much bigger debt level (relative to their GDP) to finance compared to 2010. If these countries had so much problem meeting their obligations this year, what will 2011 bring?
I personally think that the Spanish problem is the most troublesome given its size of the economy. I hope that the Spanish policy makers are right in that their problem is manageable and that they are not in denial.. Maybe the word you will hear more often in 2011 will be moratorium or debt restructuring.
(Source: http://cafe.daum.net/riskmgt)
Credit Default Swap: The Inconvenient Truth
In the early 1990s, J.P Morgan Chase & Co. (J.P. Morgan & Co. then), invented credit default swaps (CDS) to hedge their loan risks. CDS is basically an insurance contract between insurance buyer and insurance seller. The essence of the insurance contract is: the insurance seller will guarantee repayment to the insurance protection buyer should borrowers (corporations and sovereign states) default on their loans. The buyer of the insurance pays unfornt amount and yearly premiums in exchange of the protection. CDSs are traded over-the-counter (vs. standardized contracts) and are subject to counterparty risk. If the party providing the insurance protection doesn't have the money to pay the insured buyer in the case of a default event affecting securities, or if the insurer goes bankrupt, the buyer of the insurance is left hanging.
The initial intent of this particular derivative was risk management: hedging the risk of default. However, an increasing number of market participants began to use CDSs for speculation by betting whether a party will be able to meet debt obligation or go bankrupt. As it becomes more likely that a company or a sovereign state will default on their loans (the risk of default goes up), the CDS prices will go up and the speculator can now sell CDS at a much higher price to someone who seeks to protect himself against the default risk. On the other hand, if it is unlikely that a corporation or a sovereign state will default on their loan, a speculator can sell an insurance policy and collect all premiums from protection buyers. It's a pure speculation on a future event. And often times, it created a perverse incentive in the system: it significantly reduced a lender's incentive to do a thorough due dilligence since it can simply buy CDS and get all the protection it needs.
The problem is that CDSs were written on subprime morgage securities. The ones that buyers are having trouble repaying the loans let alone interests.. Many financial institutions are sitting on assets that are only worth a fraction of every dollar from mounting foreclosures and excess house supplies. To make matters worse, however, speculators traded trillions of dollars of insurance that these pools of mortgages wouldn't default. Who knew real estate related investments can turn out to be such a disappointment? AIG is an insurance company that sold hundreds of billions of dollars ($441 billion to be exact) of CDS on corporate bonds and mortage related securities. Then subprime mortgage crisis hit the system and AIG had to be bailed out. Otherwise, those buyers of CDSs would have to write down hundreds of billions of dollars worth of assets on their balance sheets, thereby creating a huge systematic problem. The federal government lended around $180 billion to AIG alone. The time is slowly coming for AIG to start repaying the bailout money, and all the news we hear is that AIG is trying to liquidate as many assets it holds to stay liquid.
The initial intent of this particular derivative was risk management: hedging the risk of default. However, an increasing number of market participants began to use CDSs for speculation by betting whether a party will be able to meet debt obligation or go bankrupt. As it becomes more likely that a company or a sovereign state will default on their loans (the risk of default goes up), the CDS prices will go up and the speculator can now sell CDS at a much higher price to someone who seeks to protect himself against the default risk. On the other hand, if it is unlikely that a corporation or a sovereign state will default on their loan, a speculator can sell an insurance policy and collect all premiums from protection buyers. It's a pure speculation on a future event. And often times, it created a perverse incentive in the system: it significantly reduced a lender's incentive to do a thorough due dilligence since it can simply buy CDS and get all the protection it needs.
The problem is that CDSs were written on subprime morgage securities. The ones that buyers are having trouble repaying the loans let alone interests.. Many financial institutions are sitting on assets that are only worth a fraction of every dollar from mounting foreclosures and excess house supplies. To make matters worse, however, speculators traded trillions of dollars of insurance that these pools of mortgages wouldn't default. Who knew real estate related investments can turn out to be such a disappointment? AIG is an insurance company that sold hundreds of billions of dollars ($441 billion to be exact) of CDS on corporate bonds and mortage related securities. Then subprime mortgage crisis hit the system and AIG had to be bailed out. Otherwise, those buyers of CDSs would have to write down hundreds of billions of dollars worth of assets on their balance sheets, thereby creating a huge systematic problem. The federal government lended around $180 billion to AIG alone. The time is slowly coming for AIG to start repaying the bailout money, and all the news we hear is that AIG is trying to liquidate as many assets it holds to stay liquid.
2010년 12월 13일 월요일
Some Important Numbers for Consideration
Low interest rates have enticed Canadians to borrow to buy big ticket items such as cars and houses that many are now stretched. According to today's Globe Business Report, the average debt per household, including mortgage and credit card debt has hit a high this year of $96,100, which is translated into the debt-to-income ratio of 146%.
According to the latest statistics from the BoC, the banks were holding $497 billion in residential mortgage loans to consumers in September. PwC’s survey on households with an annual income above $100k has found that 64% of respondents plan to cut their debt load in the next 12 months partly by deferring purchase of large-ticket items.
The higher debt level has made the Canadian economy more vulnerable to shocks such as a higher unemployment rate and declining house prices. The Canadian household debt level has alarmed the policy makers in Ottawa
There you have it folks. Many Canadians are already tapped out on the level of debt that they are able to take on and expect more deleveraging. Prior to the credit crisis, the Canadian economy and pretty much all the other economies around the world for that matter had experienced phenomenal economic growths and housing bubbles out of debt rather than improving economic fundamentals, and now we are paying the price. By taking on debts, we have borrowed future prosperity for today and the whole economy will go through a withdrawal.
2010년 12월 12일 일요일
Evidence of the Fed Bailout
In my previous blog post, I wrote that the Fed has monetized through quantitative easing to shore up distressed large financial institutions. Courtesy of Global Research, here is evidence of how the Fed printed money to provide liquidity to the banks. Before the credit crisis, the Fed's balance sheet was under $900 billion, consisting mostly of high quality government bonds. However, in response to the credit crisis, the Fed's balance sheet expanded dramatically as it purchased mortgage related assets from the distressed financial institutions. Now with QE2, the Fed has been buying U.S. government bonds; ironically the bond yield has risen indicating that maybe the Fed is only few of buyers of U.S. Treasuries. These liqudity injections to the banking system, however, have not had any material impacts on the real economy as the banks hoarded money rather than lending it to the economy. Households have already maxed out on their debts and the future economic conditions are so uncertain that the banks are reluctant to lend. What is worse, they have their own problems to deal with - the toxic assets still sitting on their balance sheet and the need to be better captialized to meet the new Basel III requirement.
(Source: Global Research)
(Source: Global Research)
I Would Still Avoid U.S. Bank Stocks at All Costs
Recently, U.S.
It surely looks like these banks are finally setting their houses in order. However, my equity investing experience in the last four years has taught me that things are not always as they appear to be.
The fact is that the banks still have too much toxic assets on their balance sheets (in trillions of dollars in mortgages and mortgage backed securities) and no one knows how much they are actually worth if the banks were to sell them in the market today. Even if they have an idea of the fair value, they are better off not disclosing it to the public. Thanks to the FASB’s relaxed rule on mark to market, the banks have been able to delay reporting the losses on their books so far.
In addition, the new Basel III international capital standards will be imposed on banks in a few years. The new standards will demand that the banks are more adequately capitalized to avoid another systematic crisis that the financial sector experienced in 2008. According to the Financial Times, U.S.
To add insult to the injury, banks now face litigations that could force them to mark down their assets at the same time they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized. After lending money to home buyers, banks securitized their mortgage loans. Now investors that purchased these securitized loans argue that the mortgages were not what they were represented to be when the banks were selling these securities to the investors. The Federal Reserve is very concerned about the size of this put-back problem that it has embarked on internal investigations.
These large U.S. banks have so far been well supported by the Federal Reserve through so-called Quantitative Easing. And it is the very reason why I believe the Fed will announce more rounds of quantitative easing or equivalents to shore up the banks’ balance sheets. Had there been no liquidity injections by the FED and the U.S. government, these major U.S. financial institutions would not have survived to date.
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