Home » Posts tagged 'default' (Page 7)
Tag Archives: default
Why A Former Fed Official Fears A Global Meltdown
Why A Former Fed Official Fears A Global Meltdown
Are we headed for another global financial crisis? The market convulsions of the past week reflected a continuation of a market selloff that began on the first trading day of 2016. Investors have reasons to be fearful—but not terrified.
This year is likely to be one of financial crises in industries and countries around the world. Whether those turn into a global financial crisis is an open question, and the answer will likely turn on the health of the U.S. financial industry and broader economy. No crisis is global if American financial markets hold up. The best I can foresee, at this moment, is that a true global financial crisis is not likely.
Pundits are focused on collapsing oil prices, which reflect the technological revolution in production among nimble private producers, combined with weakening global demand for their product. The result has been layoffs in the energy industry, and there will be more. Weak and highly leveraged energy firms have gone bankrupt and more will. But bankruptcy doesn’t necessarily mean that production will decline.
Creditors who lent to these energy producers will suffer losses on their loans, and they too might become financially impaired. If past is prologue, those lenders will be reluctant to fully realize their losses, and they will continue to view future energy prices through too-rosy glasses. Banks will be reluctant to mark down the value of nonperforming loans and book losses, or even set aside sufficient loan loss reserves. They will instead “extend and pretend”—i.e., extend maturities and pretend they expect the loans to be paid back. Will federal and state banking regulators aid and abet the process?
…click on the above link to read the rest of the article…
Maduro “Wake Up” Call For OPEC As Venezuela Crude Crashes To 13 Year Lows
Maduro “Wake Up” Call For OPEC As Venezuela Crude Crashes To 13 Year Lows
More jawboning and hope…
- *VENEZUELA’S MADURO SAYS HE SPOKE W/RUSSIA’S PUTIN ON OIL
- *RUSSIA’S PUTIN AGREED TO WORK ON OIL PRICE ISSUES: MADURO
- *SOME OPEC PRODUCERS ‘WAKING UP’ TO OIL SITUATION: MADURO
- *VENEZUELA OIL PRICE REACHED $20.20/BBL YESTERDAY, MADURO SAYS
- *VENEZUELA SHOULD REPLACE OIL AS MAIN FX INCOME SOURCE: MADURO
- *VENEZUELA’S MADURO SAYS HE HOPES OIL MARKET RECOVERS
“Some OPEC countries that flooded the oil market are now waking up,” President Nicolas Maduro said on state television.
Flooding oil market was “suicidal policy” by some oil producers: Maduro
Maduro said he spoke with Russia President Vladimir Putin on oil prices – “We agreed to continue working on a common vision, a common plan”
Hope is not a strategy…
As we concluded previously, what all this translates to is simple: first default, then revolution.
Which is good news for those who buy CDS. Our only hope for those who have held so far is that the counterparty you will have to novate with will still be around once the sparks fly, because once this first OPEC member goes bankrupt, things will start moving very fast.
Finally, for all those who are praying for an oil bounce, your day may be near, because nothing will send the price of crude soaring quite as fast as one entire OPEC nation suddenly entering a death spiral of chaos.
A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”
A Glimpse Of Things To Come: Bankrupt Shale Producers “Can’t Give Their Assets Away”
We’ve also been keen to point out that the long list of cash flow negative US producers has only managed to stay in business this long because Wall Street has thus far been willing to plug the sector’s funding gap with cheap financing thanks to ZIRP and investors’ insatiable demand for anything that looks like it might offer some semblance of yield.
It is not a matter of “if” but rather a matter of “when” the entire complex goes under and when that happens, the relatively paltry sums banks have set aside against losses in their energy books will balloon as everyone on Wall Street simultaneously pulls a BOK Financial.
Indeed, we’re already hearing the not-so-distant rumblings of this oncoming default freight train as JP Morgan raises its net loan loss reserves for the first time in 22 quarters, Wells Fargo discloses $17 billion in “mostly” junk energy exposure, and Citi dodges questions about the reserves it’s holding against a $58 billion energy book that the bank may or may not be marking to market depending on what the Dallas Fed “didn’t” tell banksearlier this month.
M2M or no, higher provisions or not, the end of America’s oil “miracle” is coming and there’s nothing Wall Street can do to stop it. At this point in the game, no one is going to finance these companies’ cash flow deficits and the fundamentals in the oil market are laughably bad. Storage is overflowing, demand is withering, and supply is, well, “drowning” us all, to quote the IEA.
…click on the above link to read the rest of the article…
Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount
Italian Banks Collapse, Short Sales Banned As Loan Loss Fears Mount
Italian bank stocks are crashing (with BMPS down 40% year-to-date) as Reuters reports that investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid. The broad banking sector is down 4% with stocks suspended, and in light of this bloodbath, Italian regulators have decided in their wisdom, to ban short-selling of some bank stocks (which has driven hedgers into the CDS market, spking BMPS credit risk).
Italy’s banking index was down over 4 percent with shares in several lenders, including the country’s biggest retail bank Intesa Sanpaolo and the third biggest lender Banca Monte dei Paschi di Siena, suspended from trading after heavy losses.
Bloodbath for Italian financials in 2016…
But don’t worry:
- *MONTE PASCHI CEO CONFIRMS FINANCIAL STABILITY OF BANK
- *MONTE PASCHI CEO: STOCK DECLINE NOT JUSTIFIED BY FUNDAMENTALS
Investors are growing increasingly nervous about how the sector will cope with lower interest rates and a 200 billion euro ($218 billion) pile of loans that are unlikely to be repaid.Those concerns are trumping expectations about a wave of consolidation set to sweep the sector, with cooperative banks under pressure to merge following a government reform to reduce the number of lenders.
JP Morgan said this month Italian banks should be avoided because low rates are expected to put pressure on revenues more than in other countries and credit problems limit a recovery in provisions.
Traders have suggested exiting investments that have been particularly favoured, such as Popolare di Milano and Intesa, as the stocks have reached key supports.
“I think upside on cooperative banks this year is much more limited,” said a London-based equity sales person.
…click on the above link to read the rest of the article…
What Just Happened With OIL?
What Just Happened With OIL?
Yesterday, we reported exclusively how the Dallas Fed is pulling strings behind the scenes to conceal the fallout from the oil market crash. As Dark-Bid.com’s Daniel Drew notes, by suspending mark-to-market on energy loans and distorting the accounting, they are postponing the inevitable as long as possible. The current situation is eerily reminiscent to the heyday of the mortgage market in 2007, when mortgage defaults started to pick up, and yet the credit default swaps that tracked them continued to decline, bringing losses to those brave enough to trade against the crowd.
Amidst the market chaos on Friday, a trader brought something strange to my attention. He asked me exactly what the hell was going on with this ETN he was watching. I took a closer look and was baffled. It took me awhile to put the pieces together. Then when I saw the story about mark-to-market being suspended, it all made sense.
Here is the daily premium for the last 6 months on the Barclays iPath ETN that tracks oil:
Initially, Dark-Bid.com’s Daniel Drew thought this was merely a sign of retail desperation. As they faced devastating losses on their oil stocks, small investors turned to products like oil ETNs as they tried to grasp the elusive oil profits their financial adviser promised them a year ago. Oblivious to the cruel mechanics of ETNs, they piled in head first, in spite of the soaring premium to fair value. After all, Larry Fink is making the rounds to convince the small investor that ETFs are indeed safer than mutual funds. Because nothing says “safe” like buying an ETN that is 36% above its fair value.
Sure, there are differences between ETFs and ETNs, particularly regarding their solvency in the event of an issuer default, but the premium/discount problem plagues ETFs and ETNs alike. Nonetheless, widely trusted retail sources of investment information perpetuate the myth that ETNs do not have tracking errors.
…click on the above link to read the rest of the article…
Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears
Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears
“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to an impairment on the loan. In addition, as we noted at the start of the commodities downturn in late 2014, we expected credit migration in the energy portfolio throughout the cycle and an increased risk of loss if commodity prices did not recover to a normalized level within one year. As we are now into the second year of the downturn, during the fourth quarter we continued to see credit grade migration and increased impairment in our energy portfolio. The combination of factors necessitated a higher level of provision expense.”
Another bank, this time the far larger Regions Financial, said its fourth-quarter charge-offs jumped $18 million from the prior quarter to $78 million, largely because of problems with a single unspecified energy borrower. More than one-quarter of Regions’ energy loans were classified as “criticized” at the end of the fourth quarter.
It didn’t stop there and and as the WSJ added, “It’s starting to spread” according to William Demchak, chief executive of PNC Financial Services Group Inc. on a conference call after the bank’s earnings were announced. Credit issues from low energy prices are affecting “anybody who was in the game as the oil boom started,” he said. PNC said charge-offs rose in the fourth quarter from the prior quarter but didn’t specify whether that was due to issues in its relatively small $2.6 billion oil-and-gas portfolio.
…click on the above link to read the rest of the article…
Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”
Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”
The professor, gazing over his glasses and down his nose at what obviously had to be an imbecile in his lecture hall calmly set aside a second of his podium time to shoot the idea down: “No.”, he said quite simply, as if he couldn’t believe he had to be explaining this to university level students, “it has to be a positive number….”.
My colleague believed him. After all, being in technology he was familiar with the computer code analogy of a negative interest rate, that being the dreaded divide by zero error. Coders take great pains to avoid these because if it actually happens, the currently running program basically “shits the bed” and all bets are off.
If the currently running program was generating a balance sheet, it may set the line printer on fire instead. If it’s deploying an airplane’s landing gear it may jettison everything in the cargo bay. It’s impossible to guess what will happen. So when people who viscerally understand the kind of consequences the ERR:DIV0 can cause extrapolate it out to an entire economy, they’re the ones that end up “shitting the bed”. It’s really bad.
I always knew that ZIRP was bad, but I just thought it would be normal, run-of-the-mill bad. You know, where most normal people get screwed for a long time, and then “suddenly” everything comes unglued and the financial system implodes, followed by a government intervention while the usual suspects (free markets and capitalism) get hung from telephone poles.
…click on the above link to read the rest of the article…
Last Bubble Standing
Last Bubble Standing
EM debt bubble… emaciated, FX Carry… crucified, Crude…crushed, High yield bonds… burst, Chinese equities… blown, Trannies… trounced, Small Caps… slammed, Biotechs… busted, and FANGs finally FUBAR!But there is one big (very big) bubble left in the world that no one is talking about, and a rather large liquidity-busting pin beckons…
In May 2015 we first explained exactly why China was blowing its equity market bubble. Simply put, with more “equity,” companies were better able to refinance/roll (note, no interest in debt reduction or deleveraging) their record-breaking mountain of debt and avoid the systemic collapse that is utterly imminent for just a few more months/years.
Now that the equity market bubble has burst, Chinese authorities have chased investors into another bubble.
In October 2015, we warned of the relative risk building in the Chinese corporate bond market.
As the rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.
Into Chinese corporate bonds…
As we detailed just two months ago, this historic bond bubble is paradoxical for the simple reason that China’s credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today’s Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can’t generate the cash required to even pay their interest, a number which drops to “only” a quarter when expanded to all industries.
“The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid,” said Xia Le, the chief economist for Asia at Banco Bilbao. “A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets.”
…click on the above link to read the rest of the article…
After Noble, Here Are The Next 18 US Energy Companies To Be Junked
After Noble, Here Are The Next 18 US Energy Companies To Be Junked
Following Noble Group’s downgrade to junk and “Enron moment,” we thought it worth considering who is next to be junked?
Judging by the market’s expectations, there are now 110 credits that are rated “investment grade” but trade like junk, and as Markit’s Neil Mehta notes, this is up from just 21 in November.
There are 18 US Energy names (and 23 globally) that are currently traded at CDS levels implying junk status, with Diamond Offshore, Nabors, and Encana top of the list.
* * *
And finally, away from the energy complex, we note that Freeport McMoran is at the top of the list of likely junk downgrades and today’s carnage has extended Carl Icahn’s losses…
as it seems FCX stockholders are getting the joke…
Freeport-McMoRan Inc
(1739bps; Av BBB; Imp CCC)
The US copper and gold producer has seen its 5-yr CDS spread trading at implied junk levels for the last six months. Troubles have intensified over the past month and credit spreads now imply a 79% chance of default within the next five years. Moody’s placed the $6bn company on review for a possible downgrade just last week.
Nigerian Currency Collapses After Central Bank Halts Dollar Sales To Stall “Hyperinflation Monster”
Nigerian Currency Collapses After Central Bank Halts Dollar Sales To Stall “Hyperinflation Monster”
Having told banks and investors “don’t panic” in September, amid spiking interbank lending rates and surging default/devaluation risks, it appears the massive shortage of dollars that we warned about in December has washed tsunami-like ashore in oil-producing Nigeria. Following the Central bank’s decision this week to halt dollar sales to non-bank FX market operators, black market exchange rates spiked to 282/USD (vs 199 official) and CDS spiked to record highs implying drastic devaluations loom.
As Reuters reports, Nigeria’s central bank is halting dollar sales to non-bank foreign exchange operators and letting commercial banks accept dollar deposits with immediate effect, its governor said on Monday, in an effort to shore up dwindling foreign reserves.
Africa’s biggest economy, an OPEC member state that depends on oil sales for about 95 percent of its foreign reserves, has been hammered by a collapse in global oil prices, which has triggered a slide in its naira currency.Godwin Emefiele said the sale of foreign exchange to bureaux de change would be discontinued because they were using up the country’s foreign reserves for illegal transactions and selling the dollar at 250 naira compared to the official central bank rate of 197 naira.
The currency hit a record low of 282 per dollar on the unofficial market on Monday after the central bank’s announcement.
Emefiele said foreign reserves stood at around $28 billion compared with $37 billion in June 2014, and that the bureaux were depleting them at a rate of $28.4 million per week.
“This is a huge haemorrhage on our scarce foreign exchange reserves, and cannot continue,” Emefiele told a news conference in the capital Abuja.
To avoid devaluing the currency, a stance so far supported by President Muhammadu Buhari, the central bank adopted increasingly stringent foreign exchange rules last year and effectively banned dollar access for the purchase of 41 items, which has also been criticised at the World Trade Organisation by the United States and the European Union.
…click on the above link to read the rest of the article…
The Cost Of China’s “Neutron Bomb” Exploding: $7.7 Trillion And Higher
The Cost Of China’s “Neutron Bomb” Exploding: $7.7 Trillion And Higher
What I think the narrative will swing to by the end of this year if not sooner, is the real issue in China is not simply that profits have peaked. The real issue is the size of their banking system. Do you remember the reason the European countries ended up falling like dominoes during the European crisis was their banking systems became many multiples of their GDP and therefore many, many multiples of their central government revenue. In China, in dollar terms their banking system is almost $35 trillion against a GDP of $10 and their banking system has grown 400% in 8 years with non-performing loans being nonexistent. So what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China’s banking system loses 10%, you are going to see them lose $3.5 trillion.
Today, months after we first covered the breadth of this most disturbing for Chinese bulls topic, the FT caught up with this critical, for China’s financial system, issue and reports that “the downturn in China’s fortunes — particularly across its heartland heavy industry — is already hitting the banks. Annual non-performing loan rates have been doubling annually since 2012. China Merchants Bank, China Everbright and ICBC are seen as among the most troubled.”
…click on the above link to read the rest of the article…
Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking
Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
– The Second Coming- W.B. Yeats
First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).
Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.
Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-
‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don’t have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off.
…click on the above link to read the rest of the article…
“Nowhere To Hide” As Baltic ‘Fried’ Index Careens To Fresh Record Low
“Nowhere To Hide” As Baltic ‘Fried’ Index Careens To Fresh Record Low
“This looks like a ripple effect from what happened back in August,” adds Alexandre Baradez, chief market analyst at IG France, hopefully looking forward, “it might continue for a few weeks, but given China’s central bank fire power, it shouldn’t last for more than that.”
But Deutsche’s “perfect storm” looms…
The improvement in dry bulk rates we expected into year-end has not materialized. And based on conversations we’ve had with several industry contacts, we believe a number of dry bulk companies are contemplating asset sales to raise liquidity, lower daily cash burn, and reduce capital commitments. The glut of “for sale” tonnage has negative implications for asset and equity values. More critically, it can easily lead to breaches in loan-to-value covenants at many dry bulk companies, shortening the cash runway and likely necessitating additional dilutive actions.Dry bulk companies generally have enough cash for the next 1yr or so, but most are not well positioned for another leg down in asset values
The majority of publically listed dry bulk companies have already taken painful measures to adapt to the market- some have filed Chapter 11, others have issued equity at deep discounts, and most have tried to delay/defer/cancel newbuilding deliveries.
The additional cushion, however, is likely not enough if asset values take another leg down; especially given the majority of publically listed dry bulk companies are already near max allowable LTV levels.
…click on the above link to read the rest of the article…
Saudi Devaluation Odds Highest In 20 Years, Kingdom Now More Likely To Default Than Portugal
Saudi Devaluation Odds Highest In 20 Years, Kingdom Now More Likely To Default Than Portugal
On Monday, we brought you “Saudi Default, Devaluation Odds Spike As Mid-East Careens Into Chaos,” in which we outlined the jump in riyal forwards and widening of CDS spreads that Riyadh witnessed in the aftermath of the kingdom’s move to cut diplomatic ties with Iran.
In short: the market is getting worried that Riyadh is about to careen into crisis. In the face of slumping crude, the Saudis are staring down double digit budget deficits and the prospect of having to once again tap debt markets in order to offset the SAMA burn and keep the kingdom from having to implement further subsidy cuts.
The open hostilities with Iran all but guarantee the war in Yemen will escalate (just today for instance, Tehran accused the Saudis of bombing the Iranian embassy in Sana’a) and that entails a further drain on the kingdom’s finances as the monarchy will be forced to fund a prolonged and intractable struggle with the Houthis.
Additionally, the more tension there is between Riyadh and Tehran, the more fractious OPEC will become and with Iranian supply set to rise in the new year as international sanctions are lifted, this may well be one Mid-East conflict that drives oil prices lower rather than higher – especially if the SAR peg falls.
On Thursday, in the wake of a veritable meltdown in markets across the globe, riyal forwards hit their highest level in almost two decades as oil plummeted. As Bloomberg notes, “twelve-month forward contracts for the riyal climbed 260 points to 950 as of 3:49 p.m. in Riyadh, set for the steepest close since December 1996 [reflecting] growing speculation the world’s biggest oil exporter may allow its currency to slide against the dollar for the first time since 1986.”
…click on the above link to read the rest of the article…
