Archive for June, 2010|Monthly archive page

Norway Takes Over Presidency Of Baltic Council

In International Econnomic Politics, National Economic Politics on 30.06.10 at 19:10

On July 1th 2010, Norway will take over the presidency over the Council of Baltic Sea States from Lithuania, according to representatives of the Lithuanian Ministry of Foreign Affairs.

The Lithuania-Nordic-Cross-Border Banking Flag

The Lithuania-Nordic-Cross-Border Banking Flag

The most important event during the period of Lithuanian chairmanship over the CBSS, was the meeting of the heads of the Council of Baltic Sea States that was held on June 1-2 in Vilnius and was one of the largest international events in Lithuania recently, The Baltic Course writes.

During the meeting, the Vilnius Declaration Baltic Sea Region Vision 2020″ was adopted that defines ecological, economic and social aspects of development in the region, and establishes political commitment to turn this vision into a reality, informed BC Lithuanian Foreign Ministry, The Baltic Course writes.

The Baltic Development Forum that took place simultaneously with the meeting of the heads of the Council of Baltic Sea States attracted the region’s business elite to Lithuania. At the forum, Lithuanian experience in overcoming the consequences of economic downturn and steps in addressing the current economic problems and using the experience of other countries were presented and discussed.

According to the representatives of the Ministry of Foreign Affairs, during the year of its presidency Lithuania mainly focused on promoting innovations, strengthening cooperation across borders, fostering a clean environment and ensuring of safe living conditions in the region. A number of events dedicated to these topics were held in Lithuania and abroad.

Credit Still Contracting

However, Lithuania’s recession is still ongoing, with domestic credit still contracting.

Domestic credit volume contracted by 244.8 million litas in Lithuania in May 2010: credit to general government diminished by 99.8 million litas, while credit to other residents went down by 145 million litas, of which lending to non-financial corporations and households went down respectively by 375.5 million litas and 95.2 million litas, while loans to financial intermediaries increased by 292.1 million litas, the Bank of Lithuania reports.

A year-on-year decrease in other monetary financial institutions’ (MFIs’) lending to non-financial corporations and households made up 9.8% and 4.8%, respectively.

Lending by other MFI’s to households shrank in May as follows: consumer loans went down by 47.4 million litas, lending for house purchase declined by 15.0 million litas, and other loans fell by 32.8 million litas. For the subsequent sixth month the annual growth rate of lending for house purchase was negative, making up –1.1% at the end of May.

Lending in euros prevailed in the lending structure of other MFIs by currency: by the end of May euro loans made up 69.5%, while litas loans made up 27.3%.

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Internal Wrangles Could Leave EU Without 2011 Budget

In International Econnomic Politics, National Economic Politics on 30.06.10 at 18:30

It’s the EU in a nutshell;  internal disagreements could leave the bloc without a formal budget next year, as newly empowered MEPs seek to use their ability to sanction the annual budget in order to extract their more longer-term wishes from member states.

“There is a real possibility of not agreeing a 2011 budget.”

Belgian EU official

This concern was expressed by a senior Belgian official at an off-the-record briefing on Monday, as the outgoing government prepares to take over the EU’s rotating presidency this week at an interesting juncture regarding future EU funding, the EUobserver reports.

“There is a real possibility of not agreeing a 2011 budget,” said the official, who has conducted extensive behind-the-scenes talks with members of the EU legislature, according to the EUobserver.

“As the first budget to be agreed under the Lisbon Treaty, it would not set a good precedent.”

The new EU rulebook, which came into force last December, hands MEPs a greater say over how the bloc spends its money.

The Belgian official said he feared euro deputies would use the 2011 budget discussions to show that parliament meant business ahead of the fast-approaching debate on the EU’s next long-term spending programme (2014-2020).

“The 2011 debate is a strategic debate,” the official said. “I hear MEPs want to have a greater say over the longer-term issues of the EU’s 2020 growth strategy and the matter of budgetary ‘own resources’.”

But there is also room for a potential argument due to shorter-term fiscal constraints.

Fiscal Constraints

Under the standard institutional game played out between EU institutions, the commission proposes a draft annual budget in the spring, which member states then generally seek to reduce and parliament usually tries to increase.

In April the commission proposed a €130 billion recession-busting budget for 2011, measured in forecast expenditure, an increase of 5.9 percent on this year’s budget.

While MEPs are likely to back the increase due to the heavier workload under the Lisbon Treaty, member states are slashing their domestic spending plans, giving in to pressure from financial markets by imposing swingeing austerity measures.

Should the parliament and member states fail to reach an agreement by the end of this year, the EU’s 2010 budget will simply be rolled out again as negotiations continue, but “cohesion payments and the European External Action Service could be affected,” said the Belgian source.

Own Resources

In September, the European Commission will come forward with an initial paper on the next multi-annual financial perspectives, plunging the Belgians into the heart of a wider debate, which will ultimately dictate much of the EU’s future actions.

While most of the tough negotiations will be carried out next year, Belgian authorities have indicated they will attempt to hold a preliminary meeting between member states, the parliament and commission officials this autumn in a bid to generate a “real discussion” on the subject.

The controversial issue of ‘own resources’ will be on the agenda, under which the EU institutions would have the power to raise their own revenue, reducing their heavy reliance on member-state contributions.

A future EU carbon tax or banking levy are among the possible sources cited so far, but opposition to the idea is fierce in a number of EU states, which have traditionally been more cautious about uploading powers to the EU level.

Their fear is that allowing the institutions to raise their own funding would provide them with an excessive level of independence. But Belgium intends to put forward proposals in the area regardless.

“Without imagination, the new financial perspectives will never be agreed,” said a senior Belgian diplomat this week, recalling the torturous debate that preceded the current budgetary period (2007-2013).

Original post at the EUobserver here.

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Moody's May Be Downgraded by Standard & Poor's

In Financial Markets, International Econnomic Politics, National Economic Politics on 30.06.10 at 11:16

What can I say? The insanity of the crisis have reached another milestone….. This is just in:

“On June 29, 2010, Standard & Poor’s Ratings Services placed its ‘A-1’ short-term rating for Moody’s Corp. on CreditWatch with negative implications.”

Standard & Poor’s

Standard & Poor’s Rating Service have just released the following press release:


* We believe there may be added risk to U.S.-based credit rating agency Moody’s business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies.

* We are placing our ‘A-1’ short-term rating for Moody’s on CreditWatch with negative implications.

* We expect to resolve the CreditWatch listing in the near term.

Rating Action

On June 29, 2010, Standard & Poor’s Ratings Services placed its ‘A-1’ short-term rating for Moody’s Corp. on CreditWatch with negative implications.


The CreditWatch listing reflects our view that an increased level of business risk is likely following the announcement that the Financial Reform Conference Committee has reconciled bills from the U.S. Senate and House, and that the agreed upon legislation could result in a change in the applicable pleading standards for certain litigation brought against rating agencies. According to our ratings criteria, we place ratings on CreditWatch when, in our view, there is a 50% chance or more of a rating change, and CreditWatch reviews can be the result of regulatory changes’ impact on an issuer’s business.

The agreed upon legislation contains a provision whereby investors may be able to sue rating agencies if they can show that the agency knowingly or recklessly failed to conduct a reasonable investigation of the factual elements relied upon by a credit rating agency’s rating methodology, or obtain a reasonable verification of those factual elements from independent third-party sources. While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody’s, whether the new pleading standard would potentially increase the likelihood of successful litigation against Moody’s will be determined in the future by the courts. Moody’s management has stated that it plans to adapt its business practices in an effort to partially offset any potential new litigation risks associated with the legislation. Nevertheless, we believe that Moody’s may face higher operating costs, lower margins, and increases in litigation-related event risk, which would likely increase its business risk (see discussion under Litigation in our Encyclopedia of Analytical Adjustments for Corporate Entities–part of our Corporate Ratings Criteria).

In addition, if the final legislation removes many or all references to nationally recognized statistical rating organizations (NRSROs) from federal regulations, it may reduce investor demand for ratings. While we believe the latter change is unlikely to meaningfully impair Moody’s business position over the near term, we plan to consider its long-term impact. As per our criteria, greater business risk and lower profitability would be key factors in a potential downward revision of our evaluation of Moody’s business profile or a potential rating downgrade. In addition, Moody’s business will likely undergo noticeable changes due to new global regulations and the U.S. legislation’s impact on industry risk, which are business risk considerations under our criteria.

While a potential weakening of Moody’s business profile is the driver for our CreditWatch listing, we will also consider the potential longer-term impact on the company’s financial profile (see our business and financial risk profile matrix under the Analytical Methodology section of our Corporate Ratings Criteria). The company currently has a strong financial profile, in our view, as demonstrated by good levels of profitability, a high level of conversion of its EBITDA generation to discretionary cash flow, low leverage, and high cash balances. At March 2010, Moody’s EBITDA margin was 46%, the company’s conversion of EBITDA to discretionary cash flow was 45%, our measure of total lease-adjusted debt to EBITDA was 2.0x, and cash balances were $504 million.


We anticipate resolving the CreditWatch listing over the near term, following our review of the final legislation and its potential long-term impact on Moody’s business position. In the event of a rating downgrade, we do not anticipate the short-term rating would be lowered to below ‘A-2’. An affirmation of the current ‘A-1’ commercial paper rating would likely involve a conclusion that the final legislation and new global regulations would not increase risk to Moody’s business position.

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Mr. Rubin's Still Rockin' The House

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 30.06.10 at 00:04

It may come as a surprise to some that, despite the fiasco at Citigroup and his role in causing the subprime mess, former Goldman Sachs CEO Robert Rubin remains inside the circle at the White House. Nearly two decades after first migrating to Washington, he apparently is still calling the shots of U.S. financial and economic policy with the full support of President Barack Obama.

“Operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington.”

Hans-Joachim Dübel

“Most recently Mr. Rubin managed the defense of Wall Street following the great crisis. No matter what Treasury Secretary Geithner says, or when he says it in public, you can be sure that those utterances have the full knowledge and approval of his handler Larry Summers and their common political owner and sponsor, Robert Rubin,” the founder of Finpolconsult, Hans-Joachim Dübel, writes.

Hans-Joacim (Achim) Dübel describes the famous former Goldman Sachs CEO, Robert Rubin, as a modern day colossus, who “effortlessly bestrides the worlds of political and finance, and mostly without leaving a trail of slime that often betrays the average political operator.”


Rubin stood at the right hand of Alan Greenspan on the famous February 1999 Time cover entitled: “The Committee to Save the World.”

He’s not an entrepreneur like Pierpont Morgan; Rubin is a mixture of banker, politician and global technocrat, a super fixer of sorts, but with a proper sense for public-private partnership.

Case in point: The famous letter from Rubin to Goldman Sachs clients when he first went to the Clinton White House saying that just because he was in Washington didn’t mean he wouldn’t be looking after them.


Here’s Mr. Dübel’s commentary:

Mr. Rubin Goes To Washington

President Bill Clinton famously called Rubin the “greatest Secretary of the Treasury since Alexander Hamilton,” yet another example of the former President’s generosity.

There’s probably a couple of dozen names on the list of the less than 100 Treasury chiefs who’ve served since the inception of the U.S. we’d put in front of Rubin. How about Albert Gallatin, Salmon Chase, Carter Glass, William McAdoo, Andrew Mellon and Henry Morgenthau to start?

In fact, reasonable people might call Robert Rubin the chief architect of the financial crisis and also of Wall Street’s grand strategy to minimize the political damage from the subprime crisis.

From his mismanagement of the U.S. Treasury’s dollar policy in the mid-1990s to his bailout for Mexico (for Goldman Sachs and other Wall Street dealers), to the rescue of Citigroup and AIG in 2008, Rubin has met or exceeded the most demanding expectations for duplicity from our public servants.

Recall the comment by former Fed Chairman Alan Greenspan about “cringing” when Rubin spoke about the need for a strong dollar and you get the idea. Yves Smith has a great summary of this period of Rubin’s career in her book Econned, BTW, in the last Rubin hit in the index.

Emboldened by the cash surpluses from Social Security contributions pouring into the Treasury and the related silly talk about the US redeeming all outstanding public debt, in the 1990s Rubin transformed himself into a deficit hawk. And using the considerable network of connections and money that is the chief asset of Goldman Sachs, Rubin became part of the permanent government that still runs Washington today.

Rubin worked first at the White House as economic policy boss, then after the abortive 1994 election sweep by the Republicans, at the Treasury.

He oversaw the bailout of Mexico in December 1994, thereby bailing out Goldman Sachs and the other banks which held Mexican exposure.

Then was forged the core gang of Rubin, Larry Summers and Timothy Geithner which comprises the Rubin political tendency today. Summers was the chief minion in those days and ran political interference for Wall Street after Rubin’s departure in 1999.

Lesser minions of Rubin today in the Obama White House include Jason Furman, a deputy to Summers on the National Economic Council and likely candidate to be the next head of the Office of Management and Budget. He would replace yet another Rubin protege, Peter R. Orszag.

Larry Summers - Timothy Geithner

Larry Summers - Timothy Geithner

Through eight years of George W. Bush and two decidedly non-Wall Street Treasury chiefs in Paul O’Neill and John Snow, the Rubin machine worked opportunities on Wall Street and groomed its new front-man, Timothy Geithner.

Geithner served as Under Secretary of the Treasury for International Affairs from 1998 to 2001 under Secretaries Rubin and Summers, where he was “a principal adviser and member of the executive branch’s senior team.”

Geithner then spent a couple of years at the IMF gaining credibility (and dodging his personal income taxes) before being made President of the Federal Reserve Bank of New York in October of 2003.

Geithner was chosen for the key Fed job by that subset of the Council on Foreign Relations which seemingly controls the Fed of New York board, a fact that the latest financial reform legislation leaves undisturbed.

The selection of Geithner was made by a search committee headed by Pete Peterson, senior chairman and co-founder of The Blackstone Group, who fortunately did not need to look far. Rubin, Summers and Fred Bergsten all reportedly “advised” Peterson on the selection of Geithner, according to the FRBNY.

Geithner has been effectively an operating asset of Rubin for the past two decades and especially after the former Treasury Secretary left Washington in 1999 to join the board at Citigroup.

As we reported prior to Geithner’s nomination as Treasury Secretary, during his tenure at the Federal Reserve Bank of New York Geithner would often speak to Robert Rubin on the telephone for hours at a time, a practice we are told by a reliable source inside continues even to this day.

What are they talking about?

The Citigroup Bailout

During the period when Secretary Geithner headed the Fed of New York, Rubin was on the board of Citigroup, a bank that would eventually be rescued at great cost to the taxpayer and C shareholders.

Robert Rubin

Robert Rubin

But what is frequently missed is that Rubin and the board knew or should have known about operational problems at Citigroup as early as 2003.

Not even two years after Rubin arrived on the board of Citigroup as a senior adviser to Chairman Sanford Weill, the largest subprime lender in the U.S. almost cratered.

During the 2001-2003 mini recession, Citigroup’s credit loss experience skewed almost a standard deviation higher than the large bank per group and stayed there until the end of 2005. As it turns out, this large loss event in terms of the bank’s credit experience was a hint of things to come.

That is, Rubin and the Citigroup board should have known in 2002 onward that there was a problem at the bank. But Rubin seemingly was too busy with other matters to know or to care. Users of the professional version of The IRA Bank Monitor may view the default series for C’s subsidiary banks by clicking here. The chart illustrates that for Citigroup, the subprime crisis began in 2002.

But where was Bob Rubin?

From 2003 through 2007, Rubin encouraged Citigroup to increase leverage and risk during the subprime boom, this while spending a great deal of time pursuing an agenda of global diplomacy that was largely unrelated to the bank’s operations.

Where were the Fed and the OCC while Rubin was AWOL from his role as board chairman? “You were either pulling the levers or asleep at the switch,” Philip N. Angelides told him during hearings on the Citigroup bailout, but Rubin refused to take personal responsibility for what occurred at Citigroup or in the larger economy, according to the New York Times.

Angelides, a former California state treasurer and a fellow Democrat, did not buy Rubin’s excuses. “You were not a garden-variety board member,” Angelides said. “I think to most people chairman of the executive committee of the board of directors implies leadership.

Certainly $15 million a year guaranteed implies leadership and responsibility.” And of course Rubin was and is exercising leadership, just not the kind that is generally understood.

When Citigroup was nearing collapse in 2008, Rubin then orchestrated the bailout of the bank in order to hide the effects of his lack of attention to the bank’s operational problems. During a series of telephone conversations with his former partner and another former Goldman Sachs CEO, Treasury Secretary Hank Paulson, the Citigroup bailout was agreed.

Rubin’s intervention saved the proverbial bacon for Rubin and the other members of the Citigroup board of directors. But also remember that Paulson’s arrival at the Treasury, in and of itself, was a sign that another financial crisis was brewing on Wall Street.

Rubin remained at Citigroup through January 2009, long enough to see the bank through the most difficult part of the crisis and bailout. He was aided by his dutiful minion Geithner, who was now at Treasury but operating under careful supervision of Summers and Rubin.

Geithner also facilitated the bailout of American International Group, again to the advantage of Goldman Sachs and other Wall Street dealers. Rubin then departed from the board of the badly damaged banking group and ascended into heaven.

Next Crisis: The Dollar

The end result of financial reform is inconvenience for the financial services industry and more expense for the taxpayer and the consumer.

Hans-Joachim Dübel

Hans-Joachim Dübel

But it should be noted that, once again, Wall Street has managed to blunt the worst effects of public anger at the industry’s collective malfeasance. The banks can now start to focus their financial firepower on winning back hearts and minds on Capitol Hill. All it takes is money.

Notwithstanding anything said or done by the Congress this year, operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington.

The fact that there is a Democrat in the White House almost does not seem to matter. President Obama arguably has a subordinate position to Rubin because of considerations of money.

If you differ, then ask yourself if Barack Obama could seek the presidency in 2012 without the support of Bob Rubin and the folks at Goldman Sachs. Case closed.

For America’s creditors and allies, the key question is whether the Democrats around Rubin are willing to embrace fiscal discipline at a time when deflation in the US is accelerating. That roaring sound you hear is the approaching waterfall of the double dip.

With the US at the moment eschewing anything remotely like fiscal restraint and the rest of the world going in the opposite direction, to us the next crisis probably involves U.S. interest rates and the dollar.

Judging by Rubin’s performance in the past, when he talked first of a strong dollar, then a weak dollar policy, and fudged the issue regarding fiscal deficits, we could be in for quite a ride.

But at some point the Obama Administration should acknowledge that this particular former CEO of Goldman Sachs is still driving the policy bus.

If the Republicans are in control of the Congress come next January, maybe they should subpoena Rubin to appear periodically. At least then we all can hear directly to the person who is actually making national economic policy.

By Hans-Joachim Dübel


FINPOLCONSULT the financial and real estate sector specialist. The company offers independent economic, market and legal-regulatory analysis and advice at the intersection of both sectors – especially in mortgage capital markets, mortgage lending and insurance, and housing policy.nd housing policy.

Original post at the Institutional Risk Analysis.

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Slaughter At The Oslo Stock Exchange (Update)

In Financial Markets, International Econnomic Politics, National Economic Politics on 29.06.10 at 15:07

The Norwegian stock market experienced a massive sell-off Tuesday, with the benchmark index tumbling 5,28%, the sharpest drop of the year. More half of the companies included in the index fell more than 5%, seven shares nosedived more than 10%.

“Those who believe in the double-dip have had a little water on the mill today.”

Jørn Lyshoel

The stocks at Oslo Stock Exchange made its sharpest drop of the year Tuesday, with share prices falling more than in other European markets. More than half of the shares included in the benchmark index fell more than 5%, and seven companies lost more than 10% of their market value.

According to the Norwegian website, it’s the U.S. Conference Board downward revision of China’s leading economic indicator by 0,3% that have put the fear back in the Norwegian investors.

According to the financial news agency, TDN Finans, one of the brokers says that the fear of a double-dip now back with full force. Adding: “And it has not been any news that has managed to calm the market.”

“But the market could turn both ways,” he points out.

Jørn Lyshoel

Jørn Lyshoel

“Both the Oslo Stock Exchange and the S&P 500 index have formed a head-and-shoulder-formation. If the S&P’s breaks down below 1050 points can quickly fall further, “ he says.

The US Index futures is down about 1,2% at the moment.

“I think it will settle down in a little while, but it is heavy today after the weak leading indicator in China.Those who believe in the double-dip have had a little water on the mill. This has an impact on commodities shares today,” Jørn Lyshoel,  strategist at Nordea Markets, says according to TDN Finans.

Dropping 5 – 15 Percent

The Oslo Stock Exchange Benchmark Index (OSEBX) ended down 5,28%, at 326,68 points, the sharpest drop so far this year.

Here’s a few examples of today’s massacre:

Acta Holding (ACTA): -5,78%

Aker Solutions (AKSO): -7,43%

Algeta (ALGETA): -10,22%

BWG Homes (BWG): -8,12%

Eitzen Chemical (ECHEM): -14,62%

Golden Ocean Group (GOGL): -7,66%

Kongsberg Automotive Holding (KOA): -11,55%

Marine Harvest (MHG): -8,74%

Nordic Semiconductor (NOD): -7,41%

Royal Caribbean Cruises (RCL): -9,51%

Renewable Energy Corp. (REC): -9,18%

Sevan Marine (SEVAN): -14,68%

Songa Offshore (SONGA): -8,44%

Here’s the whole miserable  list.

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German Banks With More Than 200 Billion Euro In Faul Credits

In Financial Markets, International Econnomic Politics, National Economic Politics on 29.06.10 at 13:05

You think  Greek and Spanish banks are in trouble? Well, that’s only peanuts compared to the trouble the German financial industry is facing; according to a new report from PriceWaterhouseCoopers the amount of non-performing loans in German banks increased by 50% in 2009, to over €200 billion, and is still rising.

“Investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards.”


The new report on European banks’ non-performing loans by Price WaterhouseCoopers is quite interesting reading. (Not to mention scary). Since the last report, nine months ago, the amount of NPL’s in European banks have rose to unprecedented levels. Ukrainian banks have an increase of nearly 2500%. However,  measured in euro the German banks are holding the most – 213 billion.

It is a well known fact that Germany would be the most affected country in the EU by the global financial crisis, given its persistent and large current account surpluses.

Recent estimates by PriceWaterhouseCooper suggest that German Banks are sitting on a portfolio of about 213 billion euro in non-performing loans – the highest amount in Europe.

The alarming estimate of the scale of the problem was released yesterday by PriceWaterhouseCoopers.

According to the report NPL Europe June 2010,  the amount of bad debt among German banks was €213 billion at end-2009 – a 50% increase from 2008.

It is natural to suspect that the figures have continued to rise since in 2010, and does not include what German banks have yet to expect from their exposure to southern Europe.

“Based on information contained in financial statements of the largest German banks, NPLs and write-downs grew significantly during 2009 and many expect this to peak mid 2010,” PriceWaterhouseCoopers writes in the report.

Deutsche Bundesbank indicated in its Financial Stability Review 2009 that additional write-downs on loans of €50 billion to €75 billion will be necessary as a result of both macro and micro economic factors in 2009.

I guess it will be closer to 75 than to 50 when the final numbers are on the table.

Between 200 And 220 Billions

“2009 NPL volumes are an estimate based on movement in the loan loss provision and gross NPL volumes for a sample of banks covering 75 per cent of total assets in Germany. Based on these estimates, NPLs in Germany could be as high as EUR200 billion (using a 34 per cent growth rate) to EUR220 billion (using a 50 per cent growth rate) at the end of 2009,” PWC points out

All the key banks in Germany experienced significant portfolio deterioration during 2009.

The chart below shows the development in the largest German banks non-performing loan portfolios:

Last year, the German bank regulator produced a worst-case scenario of some €800 billion in write-offs.

And while we are not there yet, it is quite alarming to see that by end 2009, we were already a quarter of way, and they’re expected to rise significantly over the next couple of years.

Europe’s 620 Billion Problem

An oversight of 16 European countries shows a stunning total of 619,7 billion euro in non-performing loans.

For some – unknown – reason, French banks are not included.

The increase in NPL’s varies from 28% (Spain) to unbelievable 2447,6% (Ukraine).


Will Need To Work Together

PriceWaterhouseCoopers conclude that the banks and investors will need to work together and reach some kind of compromise when it comes to the NPL’s, who in fact are illiquid assets at the moment.

“One major change observed is that investors claiming to have money and chasing NPL and non-core portfolios are back in force. The big question is how much this money costs and for how long can it be put to work. In most cases, NPL portfolios and to a lesser extent non-core portfolios are illiquid assets and require an investment horizon of at least three to four years. Experience over the last nine months suggests investors are pricing portfolios with the aim of getting their money back with a healthy IRR within two years,” PWC notes.

“On the bank side, in almost all countries the provision coverage of NPLs has decreased despite increasing levels of NPLs and non-core assets, indicating that banks may be underestimating their defaulted assets. In addition to this, there is evidence some banks are still using historical values for underlying collateral. Should updated appraisals be performed, collateral valuations will likely decrease, bringing further strain on loan to value covenants. The result is that the uncollateralised portion of the NPLs and sub-performing loans is being understated. The flow-on impact of this would be that the loan loss provision (LLP), which is applied to the uncollateralised portion of the loans, may also be understated.”

“Given the above, investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards. There are now 10 European markets with NPLs of over EUR5 billion, which means there are plenty of  opportunities to put this into effect. A key question over the next six to nine months is whether funding and collateral values will stabilize or even begin to increase enough to align the pricing of both buyers and sellers,” PriceWaterhouseCooper concludes.

For more shocking details; here’s a copy of the PWC report “NPL Europe June 2010”

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El-Erian On G20: A Non-Cooperative Game

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 28.06.10 at 19:29

Pimco’s Mohamed El-Erian considers whether the G20 Summit in Toronto created a constructive compromise on financial stability, or generated a losing plan to turn around a slowing global economy. The chief executive of the worlds largest bond fund see the last alternative as most likely.

“The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.”

Mohamad El-Erian

“We are digesting this morning an unusually long communique from the G20 Summit in Toronto. This self-congratulatory statement is worth reading for what it says and how it says it-both of which make me worry even more about the future of a post-global financial crisis world that is in desperate need for better cross-border policy coordination and harmonization,” Mr. El-Erian writes in today’s edition of Financial Times.

Some will attribute the length of the “G20 Toronto Summit Declaration”-49 main points and another 82 in 3 annexes-to the pronouncement in the very first paragraph that this was the “first Summit of the G20 in its new capacity as the premier forum for our international economic cooperation.” And we should have no doubt that the G20 is a much more representative global policy forum than the outmoded G7/G8.

Yet, there may be much more to the unusual length of the communique.

I suspect that many veterans of multilateral gatherings will see this communique as typical of those drafted by a committee whose members have different views and priorities, and speak to different national audiences.

Indeed, we are already seeing the G20 communique being spun very differently in national capitals.

If anything, the outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world.

If anything, we are being exposed this morning to the realities of different national historical experiences, different national initial conditions, and different national views on how economies should and do work.

The differences are most visible in the sections on fiscal adjustment and growth. They are also evident in the discussion of financial sector reform. Indeed, there is something for everyone!

Before we rejoice too much about the ability of the G20 to deliver constructive compromises, we should think carefully about the consequences of leaving major issues unresolved and, thus, essentially kicking the can down the road when it comes to serious analysis and courageous decisions.

Consider the following three points as a partial illustration of this risk:

First, the communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms.

The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.

Second, taken at face value, the communique speaks to a relative world in which the US will be the only major country to pursue expansionary policies while others focus on addressing budgetary consolidation-either because they have to or because they wish to.

This is yet another factor that points to an increasingly unstable global configuration over time.

Third, we will likely face growing bilateral frictions due to the inability to use this weekend’s G20 gathering to properly address what I argued in a Friday FT column to be an incomplete and narrow characterization of the “growth now” versus “austerity now” debate.

The bottom line is as follows: I worry that, absent some urgent mid-course corrections, this weekend’s G20 gathering has failed to mark a much needed turning point for a slowing global economy with persistently high unemployment in industrial countries.

Instead, it reinforces the concern than we are in for a future of muted growth, deleveraging, periodic debt dislocations in some countries, and higher protectionist pressures.

Populations in Europe and the US may have much more to worry about than seeing so many of their teams knocked out early from the World Cup tournament in South Africa.


Mohamad El-Erian is chief executive and co-chief investment officer of Pimco. El-Erian’s previous commentary on the G20’s earlier Busan summit is available here.

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Investors Are Dumping Covered Bonds

In Financial Markets, International Econnomic Politics, National Economic Politics on 28.06.10 at 16:06

European institutional investors are now dumping their covered bonds, as the European Central Bank is about to close its purchasing program.

“Investor demand has been wilting given the record €126 billion issuance over the first half of 2010.”

Societe Generale

Investors now rush to sell covered bonds as the European Central Bank prepares  to pull the plug on program, according to Structured Finance

Covered bond issuance has been strong over the past five trading days on the back of banks looking to take advantage of the final days of the European Central Bank’s (ECB) purchase program.

The program ends in the middle of this week.

Companies in Europe have so far sold €34.9 billion euros ($43 billion) of covered bonds in June, already more than double May’s sales of 11.1 billion euros, according to data compiled by Bloomberg.

Sales totaled 169 billion euros in the last six months compared with €233.4 billion in 2009, Bloomberg data showed.

Societe Generale analysts said that investor demand has been wilting given the record €126bn issuance over the first half of 2010.

It’s likely that as a result issuance activity will slow down, as the markets are traditionally closed from mid-July to end-August.

But market economists, including Barclays Capital, Nomura International and Citigroup , have called for the ECB to extend the life of its program given the developing sovereign debt crisis.

Related by the Econotwist:

Why Optimists Are Wrong About The Euro Zone

U.S. Covered Bond Legislation: Same Shit – New Wrapping?

EU Wants To Tax Bonds Of Deficit Countries (And Old People)

Warning: Investing In Europe Can Make You Crazy

European Banks: “Leman Times Ten”

ECB Announces Bailout Program


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