Showing posts with label germany. Show all posts
Showing posts with label germany. Show all posts
Friday, May 08, 2009
FOR years leaders in continental Europe have been told by the Americans, the British and even this newspaper that their economies are sclerotic, overregulated and too state-dominated, and that to prosper in true Anglo-Saxon style they need a dose of free-market reform. But the global economic meltdown has given them the satisfying triple whammy of exposing the risks in deregulation, giving the state a more important role and (best of all) laying low les Anglo-Saxons.
At the April G20 summit in London, France’s Nicolas Sarkozy and Germany’s Angela Merkel stood shoulder-to-shoulder to insist pointedly that this recession was not of their making. Ms Merkel has never been a particular fan of Wall Street. But the rhetorical lead has been grabbed by Mr Sarkozy. The man who once wanted to make Paris more like London now declares laissez-faire a broken system. Jean-Baptiste Colbert once again reigns in Paris. Rather than challenge dirigisme, the British and Americans are busy following it: Gordon Brown is ushering in new financial rules and higher taxes, and Barack Obama is suggesting that America could copy some things from France, to the consternation of his more conservative countrymen. Indeed, a new European pecking order has emerged, with statist France on top, corporatist Germany in the middle and poor old liberal Britain floored.
At the April G20 summit in London, France’s Nicolas Sarkozy and Germany’s Angela Merkel stood shoulder-to-shoulder to insist pointedly that this recession was not of their making. Ms Merkel has never been a particular fan of Wall Street. But the rhetorical lead has been grabbed by Mr Sarkozy. The man who once wanted to make Paris more like London now declares laissez-faire a broken system. Jean-Baptiste Colbert once again reigns in Paris. Rather than challenge dirigisme, the British and Americans are busy following it: Gordon Brown is ushering in new financial rules and higher taxes, and Barack Obama is suggesting that America could copy some things from France, to the consternation of his more conservative countrymen. Indeed, a new European pecking order has emerged, with statist France on top, corporatist Germany in the middle and poor old liberal Britain floored.
Read the full Economist.com article HERE
As the author points out in the end of the article, I also believe that this is just short lived and we will see that in future things are going to come back where they were before the recession but with more state regulations etc. But the leaders of "state run" countries specially France can give a short term pat on their back, for the time being at least.
Sunday, March 29, 2009
The recent bailout of Romania by the International Monetary Fund puts the spotlight back on the East European block of countries and what it means for the Western European banking sector. If evidence is anything to go by, things are turning for the worse. In fact, if a block of countries could be termed 'sub-prime', Eastern Europe seems to qualify as the countries seem to have been battered and bruised big time by the ongoing global financial turmoil.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
Current account deficit as percentage of GDP
Consequently, the region's currencies also plummeted. Banks in Hungary and the Baltic states fueled consumer boom in recent years by lending heavily in foreign currency, most notably Euro and the Swiss Franc. Sometime, more than 50 per cent of a local bank's loan portfolio was in foreign currency.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Country Vulnerability Scorecard
Country Vulnerability Scorecard
Not surprisingly Iceland is at the top. This country has become a poster boy of doom invited by reckless policies. But what is more important to note is that in the top 14 countries in the above lists, eight are from Eastern Europe. Fortunately for us Indians, we are in a much better position at 25.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
And because of this huge exposure, the growing crisis in Eastern Europe is now proving critical to their financial health. Furthermore, a fall of any one of these banks due to losses on their operations in Eastern Europe will add a new threat to the stability of the European financial system.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
Going by this, Austria is the country most at risk. It is followed by Germany and Italy. However, to understand the real problem, it is important to bring the size of the economy to focus which will give the extent of risk at relative level. Doing so brings about an interesting situation.
Exposure of Western European banks to Eastern Europe as percentage of GDP (2008)
Source: GDP data from IMF (2008 estimate), banking sector exposure data from BIS
Clearly, Austria is the country that is at maximum risk with exposure topping 60 per cent. Their top four exposures are in Czech Republic, Romania, Hungary and Slovakia. Of these, Romania and Hungary are already facing problems.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Thursday, March 26, 2009
UK's Story (March 25th 2009):
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
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