Posts from Monday Dec 12 2011

Further further reading

For the commute home,

– More on European deleveraging, via Bloomberg. Read more

Chinese gold imports from HK hit record

Chinese gold imports from Hong Kong, a proxy for overseas buying, hit a fresh record high in October and accounted for more than one-quarter of global demand, the FT reports. Data from the Hong Kong government showed that China imported 85.7 tonnes of gold via Hong Kong in October, up 50 per cent from the previous month and up more than 40 times from October last year. It is the fourth consecutive month that China’s gold flows through Hong Kong have hit new highs. Tom Kendall, precious metals analyst at Credit Suisse in London, said: “It is a big but credible number as the price arbitrage between London and Shanghai was definitely favourable for Chinese imports during late September and throughout October.”

Chelsea striker Anelka heads to China

Chelsea striker Nicolas Anelka is moving to Shanghai to play in the Chinese Super League, the biggest name recruited to a division that has been dogged by corruption scandals and poor performance, reports the FT. The former Arsenal and Real Madrid player will join Shanghai Shenhua, which said on Monday it had agreed with Chelsea for the 32-year-old French player to arrive next month with a two-year contract. The club would not divulge Anelka’s salary details, other than to say it would pay him more than Chelsea did. Chelsea confirmed the deal in a brief statement on its website.

Sino-Forest admits default

Is it all over for Sino-Forest?

The timber firm can’t even keep its own deadlines, never mind those of bondholders. Read more

India’s CBI charges Essar executives

Billionaire Essar Group founder Ravi Ruia has become the latest senior executive to be charged as part of sprawling investigations into alleged corruption in India’s telecoms sector, the FT reports. India’s Central Bureau of Investigation on Monday filed charges against Mr Ruia, vice-chairman of Essar. Charges were also brought against his nephew Anshuman Ruia, a director at the group, and three other executives at Essar and other companies. The new charges are not directly related to the broader investigation of corruption in the issuance of second-generation mobile licenses in 2008, which is said to have cost India’s government up to $39bn in lost revenue.

China market regulator in new show of strength

China has exposed its biggest-ever case of stock market manipulation in a show of strength by the new securities regulator, who has vowed to crack down on rampant illegal trading, reports the FT. An investment company was accused by regulators of orchestrating “pump-and-dump” schemes related to 552 different stocks for a profit of Rmb426m ($67m).The company, identified by the China Securities Regulatory Commission as Guangdong Zhonghengxin, was a small player in the industry, but the prominence of the reports about the case in the country’s leading financial newspapers on Monday suggests authorities wanted the announcement to have a big impact.

Indian industrial output drops 5.1%

India’s industrial output has fallen for the first time in more than two years, sending the rupee to an all-time low and highlighting the vulnerability of emerging market s to the eurozone debt crisis, the FT reports. Industrial production dropped 5.1 per cent in October from a year earlier, official data showed on Monday, bolstering the case for monetary easing in Asia’s third-largest economy. “The data are way worse than we were expecting,” said A Prasanna, economist at ICICI securities in Mumbai. “Usually output is lower during the months of October and November as there are fewer working days due to the festival season but a 5.1 per cent drop is significantly more than we predicted.” Manufacturing output, which accounts for about three-quarters of industrial production, dropped 6 per cent in October. Capital goods production, considered a barometer of investment sentiment in the country, fell 25.5 per cent.

Russian oligarch to challenge Putin

One of Russia’s richest tycoons said on Monday he would run for president against Vladimir Putin in next year’s election, prompting speculation that the Kremlin may be trying to contain growing public dissent in its “managed” democracy, the FT reports. Mikhail Prokhorov, 46, the third-richest man in Russia and owner of the New Jersey Nets basketball team, returned to the political fray after thousands of middle-class voters demonstrated at the weekend over alleged vote-rigging in parliamentary elections. Mr Putin’s announcement in September that, after four years as prime minister, he would return to the presidency next year, has fanned middle-class anger. Mr Prokhorov’s decision to run came as Alexei Kudrin, the former finance minister, said he would support the creation of a liberal party as an alternative to Mr Putin’s United Russia party. The timing fuelled speculation that the politicians were not acting independently but had received a nudge of encouragement from the Kremlin.

Markets skittish as EU deal glow fades

Markets sold off as the bounce delivered by last week’s European summit deal looks to be fading, reports the FT. Demand for European and US equities fell, with the FTSE All-World equity index down 1.6 per cent and the S&P 500 index dropping 1.5 per cent after Intel cut its fourth-quarter earnings guidance. Risk appetite was weak, with the dollar index – which tends to have an inverse correlation to investor bullishness – up 1.1 per cent. The euro also resumed declines and German Bund yields fell 8 basis points to 2.04 per cent. In the US, 3-year benchmark Treasury yields were trading at 0.35 per cent after the government sold $32bn of the securities at auction. News over the weekend that China’s raw material imports surged in November didn’t help commodities. Copper was down 2.6 per cent to $344.3 a pound, and Brent crude was lower by 1.1 per cent to $107.43 a barrel. Growth-focused assets rallied late last week as many investors broadly welcomed moves by the European Central Bank and eurozone leaders to calm credit markets. Some of that improved sentiment initially carried into today’s session in Asia, but wariness about the eurozone’s prospects were hard to dispel. Moody’s, for example, said it will review its ratings for European countries because it did not believe the bloc had delivered any decisive measures that would halt the fiscal crisis. The single currency took a leg lower as the European day moved into gear, falling below $1.33 per euro and transmitting across asset classes. Declines accelerated in US trading hours, with the euro sliding 1.5 per cent at $1.3183. The euro is the worst performing major currency this month, down about 1.9 per cent against the greenback.

“Financial repression” part II: a critique

So, “financial repression” is everywhere — or is it? In Part 1, we gave you a recap of the concept from a recent BIS paper.

At the back of the paper are critiques from Ignazio Visco and from Alan M. Taylor. Both commentators commend the paper while introducing some important caveats that are worth bearing in mind when trying to relate the idea to the current crisis. Read more

“Financial repression” part I: a recap

“Financial repression” was common in the four decades after the second world war and is essential to understanding policymakers’ responses to current credit problems in the US, Europe and China.

These are the conclusions of a BIS working paper by Carmen M. Reinhart and M. Belen Sbrancia, which was released on Friday as an updated version of this IMF paper published back in March. It’s an excellent starting point for understanding what is meant by “financial repression” and its policy consequences. And this version is especially interesting for the critiques contained in the appendix, which caution against reading too much into the idea. Read more

How dealers may have exacerbated the funding crisis

Another interesting snippet from the BIS quarterly review regarding the role played in the recent funding crisis by the deteriorating operational capacity of broker dealers:

Traditionally, these have not been collateralised. Short-dated CDS premia increased sharply for US and European dealers in September and November (Graph 6, left-hand panel). The November increase came after the failure of MF Global highlighted the importance of sovereign risks. As their own funding conditions deteriorated, securities dealers tightened terms on securities financing and reduced their market-making activities. A Federal Reserve survey of 20 large securities dealers, published in October, already showed that financing asset-backed securities, corporate bonds and equities had recently become more expensive and required more collateral (Graph 6, centre panel). Read more

Make your own (collateralised) gold standard

We know the gold bug/Austrian case.

When the United States broke away from the gold standard in the 1970s it allowed for unchecked credit creation, beyond what could  realistically be supported by economic growth. Read more

Don’t forget the advisers

Alternative title: The bull that got away.

Everyone else has got it in the neck for the failure of RBS, so it’s only right that we remember those who masterminded the disastrous acquisition of ABN Amro. Read more

Whose PSI is it anyway?

As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines… Or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.

That would be Herman Van Rompuy, talking gibberish about debt restructuring to journalists (via Bloomberg) way back at Thursday evening’s Eurofudge summit. This is prime Eurofudge, and just as important relative to what the summit did about structural deficits, automatic consequences for deficit failures, and so on. Read more

The Sarko and Corzine trade

The following raised some eyebrows in the FT newsroom on Friday.

Via Reuters: Read more

BIStimates of the over-the-counter derivatives market

Depending on which way you want to look at it, over-the-counter derivatives either increased or decreased in size, as of mid-2011.

That’s according to Bank for International Settlements statistics that were released back in mid-November. Further discussion of the results came out on Monday as part of the BIS’s bigger quarterly review though. Read more

Regulating 2000s RBS… with 2010s rules

…we don’t like carrying more capital than we need to. You’ve heard me before on the subject of building up war chests and carrying; that’s not the way we would wish to operate at all.

At end-2006 and end-2007 respectively, RBS published tier 1 capital ratios of 7.5% and 7.3% of RWAs, and total capital ratios of 11.7% and 11.2%…

 Read more

Sovereign downgrades and the eurozone

As S&P decides whether to downgrade Germany and the five other triple-A members of the eurozone, RBS considers who would be hardest hit by the move other than President Sarkozy and his re-election hopes.

The answer, predictably enough, is the EFSF and its successor… Read more

Fines all round?

From the new-fangled EU fiscal compact declaration:

5.  The rules governing the Excessive Deficit Procedure (Article 126 of the TFEU) will be reinforced for euro area Member States. As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed. Steps and sanctions proposed or recommended by the Commission will be adopted unless a qualified majority of the euro area Member States is opposed. The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60% needs to be enshrined in the new provisions.

 Read more

Markets Live transcript 12 Dec 2011

Live markets commentary from 

What the FOMC will (merely) discuss tomorrow

We’ll wait to see if Fedwire has any updates to his article from last week, but right now it seems likely that no major policy decisions will come out of tomorrow’s one-day meeting of the FOMC.

As our colleague Robin Harding points out, one reason for the delay is that the outcome of the debate on extending the payroll tax cut and unemployment insurance won’t yet be decided, and the Fed therefore won’t know how much fiscal drag the economy will be dealing with next year. Read more

Frustration over Madoff payouts, three years on

Almost three years to the day since the arrest of Bernie Madoff, his victims’ trustee, Irving Picard, has collected $8.69bn – roughly half the $17.3bn in customer funds estimated to have been lost to the fraud, the FT reports. Frustration with the pace of recovering funds has grown following recent court decisions that have limited payouts from suing banks and long-time customers of Madoff. The rulings could limit the recoveries sought by Mr Picard by up to $11bn, the NYT says.

A sub-optimal solution to the Euromess [updated]

Policy changes the ECB announced last week will help banks directly and governments indirectly. But the EU fell short on every element of a comprehensive deal. On Friday, investors reacted positively to what was sold to them as a “fiscal compact”. But once the implications of a separate treaty are understood, I fear disillusionment will set in. — Wolfgang Münchau.

And sure enough, that’s precisely what’s happening. Analysts, strategists, and commentators across Europe are asking: ‘Where is the fiscal union?’ Read more

RBS report urges more UK bank oversight

Britain’s financial regulator has called for UK laws to be changed to ban and fine executives of failed banks, in its 500-page report into the 2008 collapse of RBS, the FT reports. The FSA’s review focused on the bank’s disastrous acquisition of ABN Amro in 2007, at the time the biggest banking takeover ever. RBS required a $71bn taxpayer rescue a year later. The FSA blamed “multiple poor decisions” for the ABN Amro debacle, the WSJ says, though conceded that it did not do enough to make RBS raise capital in early 2008, adds Bloomberg.

EU summit bounce founders

Moody’s has warned that it still plans to revisit all of its EU sovereign ratings early in 2012, “in view of the continued absence of decisive policy measures despite the recent euro area summit.” The reminder comes amid signs of growing disappointment in markets, Reuters says. The euro is now 10 per cent off its 2011 high of just under $1.50. Even the summit’s core plan for a “fiscal compact” is looking ever less workable if it has to be done without a European treaty, the FT’s Wolfgang Münchau says. Nor are the “automatic consequences” for budget failures all that clearly defined, the WSJ reports.

China’s mysterious November iron ore imports

In November, China’s PMIs signalled contraction, house prices fell in most cities, and inflation fell sharply. Trade, we learned over the weekend, is down down down. And as the FT notes, prices of petrochemicals, especially naphtha, are falling in a way not seen since the 2008.

And yet, as Bloomberg reports, demand for iron ore imports surged in November having plunged in October. Read more

Lehman estate eyes increasing Archstone stake

Lehman Brothers’ estate will ask a judge to allow it to bid $1.3bn for an increase in its stake in Archstone, the apartment company, according to Bloomberg. Equity Residential made a $1.3bn bid last week for Archstone stakes held by Barclays and Bank of America worth 26.5 per cent of the company. Lehman holds 47 per cent, a relic of a $22bn buyout in the last decade. The estate believes that Archstone is worth $1bn more than the valuation put on it by Equity Residential’s offer, although a matching cash counter-bid would not stop Equity Residential grabbing the other 26.5 per cent of the banks’ stake, the WSJ reports.

SEC presses companies on Syria and Iran links

The SEC has asked companies including Sony, Caterpillar and American Express to provide more disclosure about their business activities in Syria, Iran, Sudan and Cuba, amid growing Congressional scrutiny, the FT says. The US Congress is focusing on a loophole that allows some US subsidiaries to operate in countries where sanctions are in place. Caterpillar told the SEC in May that non-US subsidiaries “have sold and continue to sell” products to Syria, estimating that its sales there totalled $600,000 in the first quarter. All of the companies said in their filings that they did not think a reasonable investor would deem the amounts sold to these countries a material risk, although the SEC is considering requiring even non-material ties to Syria, Iran or Sudan to be disclosed.

Curse of the zombie private equity

Over half of North American investors in private equity are trapped in funds where unsuccessful managers cling on to under-performing investments in order to continue collecting fees, the FT reports. If a fund is loss-making and managers have no realistic chance of achieving a “hurdle rate” of meeting a performance target, they stand to gain from holding on to investments as long as possible as the management fee is based on the size of the portfolio. The Global Private Equity Barometer, compiled by Coller Capital, found that some four-fifths of investors had been asked by funds to extend the life-span of investment periods, reflecting the private equity industry’s struggle to find worthwhile acquisitions.