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Italy Races To Defuse €200 Billion Bad Loan Time Bomb With “Bad Bank”
Italy Races To Defuse €200 Billion Bad Loan Time Bomb With “Bad Bank”
When Portugal “surprised” senior Novo Banco bondholders with a €2 billion bail-in late last month, the market got an unwelcome reminder that euro periphery banks are far from “solid.”
Novo was supposed to house the “good” assets salvaged from the wreckage of failed lender Banco Espirito Santo, but as it turned out, a lot of those “good” assets were actually bad, and Novo ended up needing to plug a €1.4 billion hole. Initially, the plan was to sell assets but seizing €2 billion from bondholders ended up being a whole lot easier and far more efficient.
News of the bail-in came just a week after Lisbon announced that a second bank – Banif – would need state aid after running out of cash to repay a previous cash injection from the government.
As we head into the weekend, periphery banks are back in the spotlight, only this time in Italy where PM Matteo Renzi is scrambling to put the finishing touches on a plan to guarantee hundreds of billions of NPLs sitting on the books of Italian banks.
Talks with the EU Commission “have already dragged on for two years,” FT notes and need to be concluded over the next few days lest “the whole initiative should collapse.”
Of course Renzi missed what amounted to a deadline on “fixing” the problem under the old rules governing bank resolutions.
One reason the Novo Banco and Banif bail-in and bailout (respectively) were pushed through in what appeared to be a kind of haphazard, ad hoc fashion was because new rules came into effect on January 1 that would have put uninsured depositors on the hook for losses. The same rules require 8% “of a bank’s liabilities to be wiped out before public money can be used,” FT adds.
…click on the above link to read the rest of the article…
Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In
Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In
Two weeks ago, The Bank of Portugal shocked markets by bailing in senior Novo Banco bondholders.
Novo Banco was the “good” bank forged from the ashes of Banco Espirito Santo which had to be bailed out by the state in August of 2014. The idea was to sell Novo Banco to pay for the cost of the bailout, but the auction process eventually floundered amid turmoil in Chinese markets (at least two of the potential bidders were Chinese) and uncertainty about whether this “good” bank would in fact need more capital given the elevated level of NPLs already on its books.
In November, the ECB told Novo it woudl indeed need to raise some €1.4 billion in fresh capital which the bank initially said would come from asset sales. A little over a month later, Portugal’s central bank essentially just gave up. On December 29, the bank announced it was transferring €2 billion in NB senior notes back to Banco Espirito Santo which, like a ghost skyscraper in China, is set for demolition.
In other words, Novo Banco plugged the €1.4 billion hole by essentially declaring €2 billion in bonds null and void.
There were five issues affected but you can get a pretty good idea about what happened next by having a look at how the 2017s traded that morning:
The reason this had to be done quickly was because if Portugal had waited until January, uninsured depositors would have been at risk under the EU’s new bank resolution mechanism. Plus, Portugal is anxious to get the auction process started again to avoid the decidedly unappealing prospect of having to keep the cost of the bailout on Lisbon’s books in perpetuity thus inflating the fiscal deficit by an extra 3% of GDP.
…click on the above link to read the rest of the article…
Puerto Rico To Default On Some Bonds January 1 – Live Feed
Puerto Rico To Default On Some Bonds January 1 – Live Feed
- PUERTO RICO SAYS IT WILL DEFAULT ON SOME DEBT DUE JAN. 1
- PUERTO RICO TO MISS $1.4 MILLION DUE ON PFC BONDS DUE JAN. 1
- PUERTO RICO TO MISS $35.9 MILLION DUE ON PRIFA BONDS
- PUERTO RICO TO MAKE JAN. 1 GENERAL OBLIGATION DEBT PAYMENT
Nearly $1 billion comes due on Friday, some $330 million of which is GO debt. Because a full payment is next to impossible, Padilla must decide who gets paid and who doesn’t. Live feed:
And the reaction in the monolines:
* * *
Background
In what’s starting to feel a bit like the Greek saga that unfolded over the summer, Puerto Rico is facing another “D-Day” on January 1 when nearly $1 billion is due to creditors.
For those unfamiliar with the story, the commonwealth is struggling to crawl from under a debt pile that sums to about $70 billion but has thus far been unable to wrench concessions from Congress on restructuring in bankruptcy.
Earlier this month, the island struck a deal with the monolines that will let a previously agreed restructuring for around $8 billion in PREPA debt go ahead, and while some hope that could serve as a kind of template for the rest of Puerto Rico’s obligations, analysts and government officials alike think that’s unlikely given the complexity involved.
On December 1, Governor Alejandro Garcia Padilla used a revenue clawback mechanism in order to make a $354 million payment. The end-around effectively allowed Padilla to divert funds from other agencies that have issued bonds in order ensure the government could make good on its GO debt. A default on the GO portion (around $330 million) of what comes due on Friday would trigger a wave of messy litigation and is a situation Padilla wants to avoid at all costs.
…click on the above link to read the rest of the article…
Ukraine “Crooks” Default On $3 Billion Bond To Putin
Ukraine “Crooks” Default On $3 Billion Bond To Putin
Back in August, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton.
Under the terms of the deal, Kiev should save around $4 billion once everything is said and done. That was the good news. The bad news was that Ukraine still owed $3 billion to Vladimir Putin. Here’s what we said at the time:
“..owing Vladimir Putin $3 billion is not a situation one ever wants to find themselves in, but this particular case is exacerbated by the fact that Putin did not loan the money to Ukraine as we know it now, he loaned the money to a Ukraine that was governed by Russian-backed Viktor Yanukovych. Of course Yanukovych was run out of the country last year following a wave of protests (recall John McCain’s infamous speech at Maidan).”
Ukrainian finance minister Natalie Jaresko offered the same restructuring terms to Russia that it offered to Franklin Templeton and T. Rowe. In effect, Jaresko was attempting to tell Vladimir Putin that Ukraine would allow him to take a 20% upfront loss on the $3 billion he loaned to Yanukovych who was overthrown by the current Ukrainian government with whom Moscow is effectively at war.
As you might imagine, Putin was not at all interested. Last month, Moscow “generously” offered to accept $1 billion per year from now until 2018 (so, a “restructuring” at par). Kiev refused, noting that such a deal would violate the country’s agreement with its other creditors.
Earlier this week, the IMF ruled that the debt to Russia was intergovernmental (as opposed to private). “In the case of the Eurobond, the Russian authorities have represented that this claim is official. The information available regarding the history of the claim supports this representation,” the Fund said, in a statement.
…click on the above link to read the rest of the article…
Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment
Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment
Back in August, we said that “Something Is Very Wrong At Mexico’s Largest Construction Company…“
“Let’s say, for argument’s sake, that you’re a big company in an emerging market and suddenly, a commodities crash for the ages and a “surprise” devaluation by the world’s engine for global growth and trade sends your country’s currency into a veritable tailspin,” we wrote. “If that were the case, just about the worst possible situation you could find yourself in would go something like this (adapted from Bloomberg): “Eighty-five percent of [your] backlog is denominated in the [home currency], which plunged to a record low this week [and] almost half of [your] debt is in foreign currencies, mostly dollars.”
That was the situation facing Empresas ICA SAB which had just spooked bond investors by selling a key 3% stake in an airport operator for $56 million in order to pay down debt.
Well, after turning in its worst quarter in nearly a decade and a half in October, Empresas ICA SAB missed an interest payment this week in what Bloomberg says is “just a prelude to what’s likely to be the biggest default in Mexico in at least two decades.” Some $31 million in debt service payments came due on Monday and the company elected to utilize a 30-day grace period to try and make the payment.
“Under the terms of the indenture governing the 2024 Notes, the use of the 30-day grace period does not result in an event of default,” the company said, cheerfully.
Carlos Legaspy, a money manager who holds ICA bonds due in 2017, 2021 and 2024, wasn’t as optimistic: “Do I think they’re going to pay within 30 days? No. The 30 days are not going to make any difference.” Here’s a look at the 2024s:
…click on the above link to read the rest of the article…
Sweden Warns Of Dire “Consequences” From Massive Housing Bubble, Heavily Indebted Households
Sweden Warns Of Dire “Consequences” From Massive Housing Bubble, Heavily Indebted Households
Late last month, Sweden tripled down on QE, as the Riksbank announced it would expand its asset purchases by SEK65 billion. Or, visually:
The recent history of Swedish monetary policy is viewed by some as a cautionary tale about what can happen when a central bank attempts to normalize policy too “early.” As a reminder, the Riskbank began raising rates in 2010. Reminiscing about the bank’s decision four years later, Paul Krugman blew a gasket on the way to accusing Sweden of being a nefarious lot of job hating heretics hell bent on perpetuating global inequality by enriching creditors at the expense of impoverished debtors.
Of course Krugman needn’t have been so hard on the Riksbank. After all, they reversed course a little over a year later and since then, it’s been nothing but easing as the repo rate fell 35 bps into negative territory.
The problem, as we’ve documented quite extensively, is that Sweden’s adventures in NIRP-dom have done little to boost inflation (to be fair, unemployment has fallen).
For the Paul Krugmans of the world, that’s evidence of a hangover from the series of hikes the Riksbank embarked on beginning in 2010. For anyone who is sane, it’s evidence that, i) unconventional monetary policy is bumping up against the law of diminishing returns , and ii) when everyone is easing, no one gets the benefits.
But while NIRP may not be doing much for inflation, it sure has been effective at creating a rather scary looking housing bubble. Have a look:
We discussed this at length in “Sweden Goes Full Krugman, Gets Massive Housing Bubble.” Here’s what the Riskbank had to say about this after its September meeting:
“Low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing.
…click on the above link to read the rest of the article…
Venezuela Default Countdown Begins: After Selling Billions In Gold, Caracas Raids $467 Million In IMF Reserves
Venezuela Default Countdown Begins: After Selling Billions In Gold, Caracas Raids $467 Million In IMF Reserves
In late October, when describing Venezuela’s desperate steps to keep itself afloat for a few more months, we reported that in order to fund $3.5 billion bond payments in early November, Maduro’s government had engaged in something that is the very definition of insanity: selling the country’s sovereign (and pateiently repatriated by his deceased predecessor) gold to repay creditors.
Specifically, in the past several months, Caracas has quietly parted with 19% of its gold holdings: “Central bank financial statements posted this week on its website show monetary gold totaled 91.41 billion bolivars in January and 74.14 billion bolivars in May. At the strongest official exchange rate of 6.3 bolivars per U.S. dollar, which the bank uses for its financial statements, that decline would be equivalent to $2.74 billion.”
But while ridiculous, Venezuela’s decision to liquidate some of its gold is perhaps understandable under the circumstances: Venezulea relies on crude oil for 95% of its export revenue, and with prices refusing to rebound, the only question is when do all those CDS which price in a Venezuela default finally get paid.
What is even more understandable is what Venezuela should have done in the first place before dumping a fifth of its gold, but got to do eventually, namely raiding all of the IMF capital held under its name in a special SDR reserve account.
Recall that this is precisely what Greece did in July when everyone was speculating when it would default. Now its Venezuela’s turn.
The details: Reuters reports that Venezuela withdrew some $467 million from an IMF holding account in October, according to information posted on the fund’s web-site, as the OPEC nation seeks to improve the liquidity of its reserves amid low oil prices and a severe recession.
…click on the above link to read the rest of the article…
Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout
Treasury Warns Of “Humanitarian Crisis” In Puerto Rico If Congress Does Not Agree To Bailout
“Puerto Rico is not Greece“… but it increasingly looks like it will be in a few weeks, thanks to US taxpayers who are about to foot the bill for yet another creditor bailout.
As we reported last night, creditors of the insolvent commonwealth, hoping to get a bailout and the highest possible return on their bond investment courtesy of the US taxpayer, have been pushing to portray the fiscal situation in Puerto Rico as beyond repair, hoping to force the administration and Congress to act. As The NY Times reported, on Wednesday, Puerto Rico took the unusual step of announcing that talks over restructuring about $750 million of the island’s debt had broken off, a move that some creditors saw as posturing to Washington for help.
Then, all day today, Puerto Rico’s leadership, realizing its interests are suddenly alligned with those of its creditors as a bailout is in everyone’s best interest, took the rhetoric up a notch when the island’s Governor Alejandro Garcia Padilla said in written testimony for Senate Energy Committee that Puerto Rico will have negative cash balance of $29.8 million in November 2015, and then added that the Puerto Rico Government Development Bank may be unable to make its $355 million debt service. “These GDB bonds are supported by a guarantee from the Commonwealth, and the GDB, which faces its own liquidity crisis, is not expected to be able to make the payment on its own based on current information.”
Others quickly chimed in: Puerto Rico Senate President Eduardo Bhatia said he would be in favor of “including everything” in a broad, comprehensive restructuring of the debt.
In short: bail us out now or face the consequences of a domino effect of defaults which puts not only the creditors, but the island itself, in dire straits.
…click on the above link to read the rest of the article…
Puerto Rico To Run Out Of Cash By Year End, Faces $13 Billion Shortfall
Puerto Rico To Run Out Of Cash By Year End, Faces $13 Billion Shortfall
Remember when two months ago Schauble jokingly offered Jack Lew to “trade” Greece for Puerto Rico? Something tells us in the interim period the German finmin changed his mind because while the Greek can has been kicked again, if only for the time being until bailout #4, the full severity of the Puerto Rican insolvency was laid out for all to see moments ago when top officials and outside advisors to the commonwealth released a highly-anticipated report showing that even after implementing proposed economic reforms and budget cuts, the island’s whopping funding gap of $28 billion will at best be reduced to “only” $13 billion over the next several years.
Even worse, as the FT reports according to the report of the so-called Working Group, the Treasury’s single cash account and Government Development Bank would exhaust available liquidity before the end of the year, creating a cash shortfall in late November or early December. In other words, Puerto Rico is Greece, and unlike the German colony, Puerto Rico does not have any negotiating leverage to threaten a departure from the dollar zone, or threaten to print its own currency.
FT adds that “while the government will be able to manage around those year-end issues, the cash crunch will come to a head in June, when officials on the Working Group conceded it would be nearly impossible to tap financial markets. The plan, which will be closely scrutinised by investors who have just agreed a restructuring with Puerto Rico’s electric power authority, included proposals to consolidate the commonwealth’s education department, reorganise the Department of Economic Development and create a fiscal oversight board.”
The plan will hardly be greeted with cheers domestically as it anticipated “austerity” that makes recent Greek sacrifices seem like a walk in the park: cost cuts identified included a continued salary freeze for government employees and a request for a waiver from the Jones Act, which requires shipping to and from US ports to be conducted with American crews and vessels, increasing the territory’s transportation expenses.
…click on the above link to read the rest of the article…
This Is What Global Currency War Looks Like: A Complete History Of Recent FX Interventions
This Is What Global Currency War Looks Like: A Complete History Of Recent FX Interventions
After the dramatic collapse in the SNB’s defense of the Swiss Franc peg to the Euro, there was a period of relative FX peace in which few if any central banks engaged in outright currency intervention (aside from the countless rate cuts so far in 2015 in response to the soaring strength of the USD, which has risen dramatically over the past year for all the wrong reasons). Then China last night reminded us what happens when in a centrally-planned world one or more markets take too great advantage of relative FX differentials, in this case Japan, whose Yen plunged from USDJPY 80 to 125, and the Euro, which tumbled from EURUSD 1.40 to just above parity.
Now, it’s China’s turn.
But as we pointed out before, FX interventions never take place in a vacuum, and especially during periods of rising dollar strength, when the entire FX world, and especially exporters and mercantilists, go berserk.
Furthermore as Stone McCarthy notes, “this is the sort of “international development” that the Fed will need to keep an eye on and assess as conditions align for the start of policy normalization.” The reason is simple: what China just did could make a rate hike impossible as multinational US corporations will be slammed with a double whammy of soaring dollar and sliding CNY, making US exports that much tougher. And as we won’t tire of repeating, the Fed can not print trade.
And just to help remind readers of what happens when the entire world engages in wholesale currency war, here is a complete list of all the recent FX interventions, courtesy of Stone McCarthy.
Summary of Recent FX Interventions:
The last period of any significant Fed interventions in foreign exchange markets was during 1994-1995 when the dollar reached all time lows against what were then the benchmark currencies of the Japanese yen and German deutsche mark, and the period of the Mexican Peso Crisis. After that, it was acting to defend the value of the yen and new-minted euro.
…click on the above link to read the rest of the article…
The Great Greek Fudge
The Great Greek Fudge
A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the preciselocation in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.
If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.
The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states.
…click on the above link to read the rest of the article…
An Exasperated Tsipras Calls For Syriza Referendum On Bailout Cancellation
An Exasperated Tsipras Calls For Syriza Referendum On Bailout Cancellation
Anyone who thought Greece’s third bailout program was a done deal or that, at the very least, the market would get a few months of respite before having to grapple with daily Grexit headlines again, got a rude awakening late last week when reports of a secret plot (hatched by ex-Energy Minister Panayiotis Lafazanis along with several Left Platform co-conspirators) to storm the Greek mint and seize the country’s currency reserves underscored the deep divisions within Syriza and betrayed the extent to which passing a third set of prior actions and sealing the deal on an ESM program would prove to be anything but simple.
Just days after Lafazanis’ plan leaked last week, Kathimerini claimed it had transcripts from a conference call between former Finance Minister Yanis Varoufakis and international hedge fund managers during which Varoufakis described yet another secret ploy to return the country to the drachma by way of establishing a parallel payments system set up using surreptitiously obtained tax filer ID numbers. Later, the full audio recording was released.
At that juncture, the opposition parties which helped PM Alexis Tsipras beat back a Syriza rebellion and pass the first two sets of bailout prior actions through parliament began to ask questions.
Essentially, opposition lawmakers wanted to know whether Tsipras was allowing his party to undermine progress on the bailout just as he was desperately courting MPs from across the aisle in order to win parliamentary approval for the deal’s conditions.
On Wednesday, in an interview with Sto Kokkino radio, Tsipras addressed friction within the party andsuggested that if he lost his majority in parliament he would call for snap elections.
…click on the above link to read the rest of the article…
Austrian Bad Bank “Black Swan” Bail-In Is Unconstitutional, Austria Declare
Austrian Bad Bank “Black Swan” Bail-In Is Unconstitutional, Austria Declare
The subject of bail-ins and bank resolutions is back in the news this month as every eurocrat in Brussels scrambles to determine the best way to recapitalize Greece’s ailing banking sector, which, you’re reminded, is sinking further into insolvency with each passing day thanks to the unyielding upward pressure on NPLs that’s part and parcel the country’s outright economic collapse.
And while you could be forgiven for focusing squarely on the trainwreck that’s occurring in Athens, it would be a mistake to ignore the fact that just a few months back, a black swan landed in Austria when a €7.6 billion capital hole was “discovered” in Heta Asset Resolution, the vehicle set up to resolve the now defunct lender Hypo Alpe-Adria-Bank.
In short, the bad bank went bad, and when it became clear that no further state support was forthcoming, Heta Asset Resolution was itself put into resolution and a moratorium on bond payments was declared.
The debacle raised a number of troubling issues not the least of which involves the beautifully picturesquesouthern Austrian province of Carinthia, which had guaranteed some €10 billion worth of Heta debt despite the rather inconvenient fact that annual provincial revenues only amount to around €2.3 billion.
…click on the above link to read the rest of the article…
