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From a speech by Jaime Caruana, the general manager of the Bank for International Settlements, given at the Bank of Thailand-BIS conference on December 12:
A stylised central bank balance sheet can be helpful in clarifying the various transmission channels (Table 1). Any accumulation of assets implies an increase in corresponding liabilities. In addition, the purchase of domestic assets will directly affect their prices and therefore credit spreads, term premia and long-term interest rates. An increase in monetary liabilities – eg reserve money – will have implications for the liquidity of the banking sector in the short run, and this may undermine price stability in the medium term. But an increase in long-term liabilities could also crowd out lending to the private sector. Read more
Following the EU Summit on 9-10 December, Fitch has concluded that a ‘comprehensive solution’ to the eurozone crisis is technically and politically beyond reach…
That’s the rather deadpan punchline of a Fitch Ratings action on Friday, placing the ratings of Belgium, Cyprus, Ireland, Italy, Slovenia and Spain on negative outlook. They might be downgraded one or two notches early in 2012. They’re putting every investment-grade eurozone sovereign on negative outlook so expect a few more supplementary statements. Fitch had affirmed France’s AAA rating but revised it to negative at pixel time. (Update — see text below.) Read more
Live markets commentary from FT.com
With bank debts coming due and most firms unable to raise fresh funds in bond markets – which remain largely closed – bankers say it is much more prudent to use ECB loans to pay off their own creditors rather than speculate that European governments pay back all their debt. Read more
It must be nearly Christmas, for the last Deutsche Bank Early Morning Reid of 2011 was today.
Luckily, strategist Jim Reid and his team left us with a note on their thoughts for what the new year will hold, and reiterated their theory about how shorter business cycles will become the norm. Read more
Live markets commentary from FT.com
Fitch Ratings has cut its long-term ratings for seven major banks in Europe and the US, warning that big financial institutions “are particularly sensitive to the increased challenges the financial markets face”, the FT reports. BNP Paribas and Deutsche Bank both had their long-term issuer default rating downgraded by one notch to A plus, while Bank of America, Citigroup and Goldman Sachs were downgraded from A plus to A. Barclays and Credit Suisse were downgraded by two notches to A, Fitch announced on Thursday evening. “Over time market conditions are likely to ease, but Fitch expects market volatility to remain above historical averages and economic growth in developed markets to remain subdued for a prolonged period. This makes many business lines in securities operations more difficult, due to lower activity and higher funding costs,” said Fitch, the smallest of the three major rating agencies. Read more
François Baroin, French finance minister, on Friday added to the growing war of words between his country and Britain when he described the UK’s economic situation as “very preoccupying”, the FT reports. “At the moment, one prefers to be French than British on the economic front,” he said in an interview with Europe 1 radio. The comments come a day after Christian Noyer, head of the Bank of France, triggered a Franco-British spat when he said that a French downgrade would not be justified on economic fundamentals. On that basis, he said: “They should begin by downgrading the United Kingdom which has bigger deficits, more debt, higher inflation, less growth than us and where credit is shrinking.” His comments were angrily dismissed by British officials. “The markets clearly don’t agree with Noyer,” said a UK Treasury official. Read more
Global risk assets were rallying as investors took heart from better than expected US economic data, the FT reports. But residual wariness over the damage the eurozone fiscal crisis was having on global growth ensured gains were tentative. The FTSE All-World equity index was up 0.3 per cent, industrial commodities were generally firmer and gold was up 1.4 per cent to $1,592 an ounce. Europe was following Asia higher, with the Stoxx 600 up 0.4 per cent, while S&P 500 futures suggested Wall Street would add 0.7 per cent at the opening bell. Other symbols of risk appetite also pointed to the better mood, though appeared to somewhat lack conviction. US benchmark bond yields were up 2 basis points, but at just 1.93 per cent point to an underlying caution. Read more
Here’s an interesting ripple effect to consider… downgrades of AAA-rated European supranational debt, hitting the Australian bond market.
As Nomura rates analyst Martin Whetton wrote in a Friday note — there aren’t that many Australian government bonds. (In fact it’s led to a quality collateral shortage.) Foreign supranational debt has therefore filled the void for investors who want safe, AAA-rated exposure to Australian dollar assets. Read more
Comment, analysis and other offerings from Friday’s FT,
Philip Stephens: The highs and lows of democracy
The story of 2011 has been of the advance of democracy and the failure of democracies, says the FT’s Philip Stephens. In the Arab world, tyrants have fallen on the region’s political awakening. In rich nations, elected leaders have been frozen in crisis. Welcome to another of the paradoxes of the new global disorder. I do not recall the advance predictions that the good news this year would come from the Arab street; nor that the bad news would see a Greek debt crisis turn into an existential threat to half a century of European integration. We are in an age that habitually defies the easy assumptions of the old order. The passing of two centuries of western hegemony will be an unpredictable and uncomfortable experience.
Gillian Tett: Crisis fears fuel debate on capital controls
Is the world stealthily sliding towards capital controls? That is the question which is starting to hover, half-stated, on the edge of policy debates, as financial anxiety spreads across Europe, writes the FT’s Gillian Tett. But now, a new salvo has been fired into this debate from an unexpected source: the Bank of England. Earlier this week, the Bank released a paper on global capital flows written by three of its economists, William Speller, Gregory Thwaites and Michelle Wright, which draws heavily on earlier research by Andy Haldane, the Bank’s head of financial stability. It garnered little attention amid the eurozone dramas. But the message is sobering, important – and timely. For what the paper argues is that today’s financial turbulence might be merely a precursor of something even worse in the years ahead. Read more
Royal Dutch Shell, Philips and more than a dozen other top international companies have made an urgent plea to Brussels to prop up the flailing European Union carbon market after another week of plunging prices, reports the FT. Benchmark European carbon prices fell to a record low on Wednesday, extending their losses since January to more than 50 per cent. The market briefly lifted after UN talks which ended on Sunday in Durban, South Africa, saved the Kyoto climate treaty and agreed to negotiate a new legally binding pact covering all countries. But prices fell again after Canada confirmed on Monday it would become the first country to pull out of the 1997 Kyoto pact. In a letter to José Manuel Barroso, European Commission president, the group of companies that also includes Unilever, Alstom and Tesco said the eurozone crisis meant carbon prices were likely to stay low for at least another year in the EU emissions trading system, the world’s largest carbon market. Read more
JPMorgan sold $1.25bn of 30-year bonds on Thursday, paying historically low interest rates in spite of mounting concerns about banks around the world, the FT says. The bank benefited from plummeting yields on US Treasury bonds, which are the benchmark for bank bonds and other corporate debt. At 5.4 per cent, the bank was able to obtain the lowest coupon rate on 30-year debt in dollars sold by a US bank since at least 1995, when Dealogic, the data company, began tracking this market. But JPMorgan paid a much a higher risk premium to US Treasuries than the last time it sold long-term debt in the latest sign of how investor worries about banks have mounted this year. JPMorgan priced the 30-year bonds at a risk premium, or spread, of 250 basis points compared with a spread of 140bp when the bank sold 30-year bonds in July. The latest coupon was lower than 5.6 per cent on the bonds sold this summer. Read more
Collins Stewart Hawkpoint, the London mid-cap stockbroker, has agreed to a £253.5m takeover by the Canadian bank Canaccord, the two companies said on Thursday. The deal, the subject of market rumours for several months, was recommended by the board after six weeks of talks, Mark Brown, chief executive of Collins Stewart, told the FT. It values the company at 96p a share – a 90 per cent premium to Wednesday’s closing share price, and higher than the traded price at any time since September 2008. Sixty per cent of the consideration will be paid in cash and the remainder in Canaccord shares. Collins Stewart shareholders will also receive a dividend of 2.6p a share in January.
Asian shares rebounded from Thursday’s steep falls as investors took heart from better than expected US economic data, says the FT’s global markets overview. Hopes for a recovery in the world’s largest economy increased after US initial jobless claims unexpectedly fell to a three-year low and Federal Reserve gauges of manufacturing in New York and Philadelphia topped estimates.
The region’s economic outlook also appeared to improve after Singapore’s exports exceeded economists’ forecasts and Indonesia regained an investment grade rating for its sovereign debt at Fitch Ratings after 14 years. Read more
Zynga, the social networking games maker of FarmVille, has sold shares in an initial public offering at the top of its projected price range, valuing the company at $7bn. However, says the FT, its valuation was more restrained than past social networking offerings, pricing the company at some 11 times last year’s sales. LinkedIn and Groupon priced at more than 17 times previous-year sales. The offering for 100m shares at $10 made it the biggest technology deal to price since Google’s offering in 2004. It caps off a year that saw social networking and web groups debut despite extraordinarily volatility in capital markets that shut the IPO route to most other sectors. Company chief executive Mark Pincus received more than $109m he sold a small portion of his stake back to the games company in March at $14 a share, says the WSJ. Read more
Jon Corzine, the former chief executive of MF Global, has denied that he knew the broker-dealer lent customer funds to a European affiliate shortly before it went bankrupt, reports the FT. At a House financial services subcommittee hearing on Thursday, Terry Duffy, chief executive of CME Group, the exchange operator that oversaw MF Global’s customer accounts, repeated his claim that “Mr Corzine was aware of the loans being made from segregated accounts”. He attributed that to a CME auditor who heard the comment during a conference call involving senior MF Global employees. Addressing the House hearing on Thursday, Mr Corzine said he did not know the source of Mr Duffy’s allegation. Mr Corzine suggested that Mr Duffy may have been referring to money transferred to JPMorgan Chase as MF Global scrambled to sell billions of dollars worth of securities. Much of the remainder of the five-hour hearing focused on the missing money and who was to blame for the firm’s collapse, as NYT DealBook details. Read more
Barclays Capital is preparing for the sale of more than €1bn worth of German apartments, reports the FT, citing people familiar with the process as saying the bank has held discussions about the sale of the portfolio with private equity buyers, including Blackstone. The sale, involving 26,000 residential properties, predominantly in Berlin, Hanover and Magdeburg, would mark one of Europe’s largest residential property deals since the start of the financial crisis. BarCap took control of the residential portfolio last month after exercising a call option on a €1.36bn loan made to BauBeCon, the German residential landlord, at the peak of the market in 2007. The BauBeCon portfolio had a market value of €1.42bn at the end of June, with the yield on the portfolio at 6.8 per cent and a 4.2 per cent vacancy at the end of 2010, according to a report by CoStar Finance earlier this year. It is unclear how much BarCap has written down the value of the portfolio, but bids of between €900m and €1.2bn are understood to have been made. Read more
A draft prospectus prepared for the latest eurozone bail-out instruments includes explicit warnings to investors that the euro could break apart or even cease to be a “lawful currency” entirely, says the FT, citing a draft of the latest prospectus. The European Financial Stability Facility, which is creating the products to insure bonds of troubled countries against default, is debating whether the “risk factors” should be included in the final version. In the latest draft of the prospectus, seen by the Financial Times, a summary of the dangers to investors includes: “[R]isks arising from a Reference Sovereign ceasing to use the euro as its lawful currency . . . or the cessation of the euro as a lawful currency”. Read more
Research in Motion, the Canadian manufacturer of the BlackBerry family of smartphones and the PlayBook tablet, responded to falling profits, product problems and investor disenchantment by cutting its co-chief executives’ salaries to $1 each next year and pledging a “comprehensive review”. The FT reports RIM also warned on Thursday that its next generation of smartphones running its new operating system, dubbed BlackBerry 10 – which it needs to compete more effectively against Apple’s iPhone and Google Android handsets – will not be available until “the later part of calendar 2012”, or six months later than expected. RIM’s weak earnings pushed its stock to new seven-year lows in after-hours trading, says the WSJ, raising fresh questions about the company’s ability to compete with the likes of Apple and Google. Read more
The managing director of the IMF has warned that the global economy faces the prospect of “economic retraction, rising protectionism, isolation and . . . what happened in the 30s [Depression]”, the FT reports, as European tensions again flared over suggestions in Paris that the UK’s credit rating should be downgraded before France’s. “There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating,” Christine Lagarde said in a speech at the US state department in Washington. “It is not a crisis that will be resolved by one group of countries taking action. It is going to be hopefully resolved by all countries, all regions, all categories of countries actually taking action.” Bloomberg reports Ms Lagarde said international support would probably be channeled through the IMF for “organizing a collective financial responsibility, a fiscal solidarity and that element of risk-sharing that is expected, pretty much, around the globe.”