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Sat, 25th February 2017

Anirudh Sethi Report

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Archives of “debt” Tag

Greece : Banks worry over sudden bad loan spike in January

Nonperforming loans last month posted a major spike of almost 1 billion euros, reversing the downward course set in the last few months of 2016. This has generated major concerns among local lenders regarding the achievement of targets for reducing bad loans, as agreed with the Single Supervisory Mechanism (SSM) of the European Central Bank for the first quarter of this year.

Bank sources say that after several months of stabilization and of a negative growth rate in new nonperforming exposure,the picture deteriorated rapidly in January, as new bad loans estimated at 800 million euros in total were created.

This increase in a period of just one month is considered particularly high, and is a trend that appears to be continuing this month as well. Bank officials attribute the phenomenon to uncertainty from the government’s inability to complete the second bailout review, fears for a rekindling of the crisis and mainly the expectations of borrowers for extrajudicial settlements of bad loans.

Senior bank officials note that a large number of borrowers will not cooperate with their lenders in reaching an agreement for the restructuring of their debts, in the hope that the introduction by the government of the extrajudicial compromise could lead to better terms and possibly even to a debt haircut

China Just Created A Record $540 Billion In Debt In One Month

One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”

DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “ 

Greece facing fresh junking without bailout cash, warns Fitch

Greece is at risk of being downgraded further into junk territory should its creditors fail to resolve their latest set of differences over the country’s bailout this month, one of the world’s leading rating agencies has warned.

Ahead of its next decision on Greece in less than two weeks, Fitch Ratings said its current “CCC” junk rating on Greece was contingent on the country securing a successful injection of its latest tranche of bailout cash “well ahead of July” when it faces a major a €7bn repayments crunch.

The warning comes as finance ministers are due to thrash out their differences at a meeting in Brussels on February 20 – their last major discussion before a raft of eurozone elections beginning with the Netherlands in March and ending with Germany in September.

Fitch is due to make its next rating decision days after this month’s meeting of the Eurogroup on February 24. Greece has been unable to raise fresh funding on international markets since 2014, undergoing a fresh €86bn bailout in the summer of 2015 having been bought to the brink of default and introducing capital controls on its banking system.

A rating downgrade would also scupper the Syriza government’s ambitious plans to return to the bond markets before the end of its bailout in the summer of 2018.

Greek unemployment sticks at 23% amid escalating bailout row

Still no respite for Greece.

Amid a fresh escalation in a row over its bailout conditions, Greece’s stubbornly high unemployment rate is showing no sign of improvement.

The country’s jobless rate – which is the highest in the eurozone and has been above 20 per cent for six years – stuck at 23 per cent in November despite a general uptick in its economic prospects at the end of 2016.

The IMF has been accused by Athens and Brussels of an “overly pessimistic” view on the Syriza government’s ability to hit a 3.5 per cent budget surplus target over the next decade, which has led it to a wrong-headed forecast on Greece’s “explosive” debt dynamics.

The Fund’s latest report on the Greek economy suggest its debt-to-GDP mountain could reach 275 per cent over the next two decades without major debt restructuring. Unemployment meanwhile will only fall to 21.7 per cent this year, while the country’s long-term growth rate was downgraded to 1 per cent, IMF economists predict.

Trump tweets can change how markets see a company’s credit risk – S&P

A tweet from US President Donald Trump can move markets. It may also move the market’s perception of the credit risk posed by a company named in one of the presidential posts, according to a report from S&P Global Market Intelligence.

“Trump’s willingness to directly call out firms over Twitter has introduced a never-before-seen dynamic to the markets and, correspondingly, it has affected the market-implied credit risk for individual countries,” said Jim Elder, director of corporate and financial institutions at S&P Global Markets Intelligence.

“Since his election, and based on market reactions, the calculations of our Probability of Market Default Signals (PDMS) model have shown a short-term impact on the credit quality of individual firms that have entered his cross-hairs, for better or worse,” he added.

But the impact can vary from tweet to tweet, the report found.

Deutsche Bank Takes Out Full-Page Ad To Apologize For Its Market-Rigging Misconduct

Deutsche Bank took out full-page ads in Germany’s Frankfurter Allgemeine Zeitung and Sueddeutsche Zeitung on Saturday, in which the country’s biggest lender apologized for (getting caught) engaging in market manipulation and misconduct that has cost the company billions. In the ad, signed by CEO John Cryan on behalf of the bank’s top management,the bank said its past conduct “not only cost us money, but also our reputation and trust.

The ad said “we in the management committee and bank leadership as a whole will do everything in our power to keep such cases from happening again.”

Pressure on Greece Mounts, New Crisis Looms

The problem is uncomfortably familiar.  Greece has a chunky payment due to its official creditors.  Reports suggest that Greece has not completed much more than a third of the measures that had been agreed upon free up the next aid tranche from the 86 bln euro package.   

Time is working against Greece.  The elections in France and Germany do not provide a conducive backdrop for concessions, and public support for the Greek government is sliding.  Given the political context, it is important that Greece’s measures are implemented ahead of the February 20 Eurogroup meeting.  

If this window of opportunity is not met, the situation could deteriorate quickly.  The more Prime Minister Tsipras enacts the reforms demanded by thecreditors, the less the public supports him.  Many still suspect Greece is headed toward an election this year.  Since in some respects, Tsipras speaks the language of populism, a change in governments would likely be in the direction of the center, such as the New Democracy.  

Currently, the official creditors expect Greece to hit its fiscal targets this year.  The problem is 2018.   The key target is the primary surplus (budget balance before debt servicing).  The primary surplus in 2016 was estimated at 2.3% (of GDP).  Starting in 2018, the agreement calls for a goal of a 3.5% primary surplus.  The IMF has been insisting that considerably more dramatic action by Greece is necessary if the other official creditors refuse to reduce the debt burden, which the multilateral lender says is unsustainable.  

Fiscal deficit target of 3% for 2017-18 stiff at this juncture: Crisil

Fiscal deficit target of 3 per cent for 2017-18 looks difficult as the debt dynamics of the country show “stickiness”, rating agency Crisil said on Saturday. “Three per cent looks like a stiff task at this juncture for fiscal deficit. When the economy needs help, we need to move to a range that is going to provide the government some flexibility,” D.K. Joshi, Chief Economist at Crisil, told BTVi in an interview.

“The debt dynamics show stickiness. We have not been able to bring down the debt-GDP ratio, which is quite high for India. It complicates matters,” Joshi said. The economist said that the government needs to come up with substantial steps to push up the revenues to maintain fiscal prudence for the next two to three years.

The borrowing target, however, he said is not expected to be very large and in line with the fiscal deficit target. “The borrowing will not be too large if fiscal deficit target is three per cent. I don’t see borrowings as significant or at the level that would spook the stock market and reverse the gains.”

In FY17, spectrum or excise duty on oil that has led to revenue windfall are all temporary measures and may reverse in the coming fiscal.  Joshi said that the concern is to improve the tax-GDP ratio in the next 2-3 years.  “Let’s see how creative the Budget is in extracting higher compliance from individuals. Though there is not much scope to raise the tax-GDP ratio in the short run,” he said. “In terms of Income Declaration Scheme (IDS), I don’t see much cushion coming from these schemes. They can’t continue for ever, they should be leveraged for increasing compliance,” he added.

India : Asset quality worry for MFIs

Rating agency Icra has expressed concerns over the deterioration in asset quality of non-bank microfinance institutions in the wake of demonetisation.

The agency in a report said an inadequate supply of currency and a disruption in borrowers’ cash flows have led to a sharp decline in collection efficiencies.

The share of overdue loans in a total loan portfolio of around Rs 57,000 crore was less than 1 per cent as on September 30, 2016. But, this has increased to around 19 per cent as on December 31, 2016, Icra said.

 Factors such as over-leveraging, shortage of currency and the possibility of the borrowed amount being used for consumption rather than income generation is affecting credit recovery even as the RBI provided a special dispensation in classification of loans of microfinance institutions.

“While the RBI’s additional 90-day dispensation to classify accounts as non-performing will provide a temporary relief in asset classification, Icra believes it would be difficult for microfinance institutions to recover multiple instalments from borrowers together,” Rohit Inamdar, senior vice-president and group head – financial sector ratings – Icra.

“Over-leveraging among borrowers coupled with the shortage of currency and the impact of demonetisation on borrowers’ earnings will adversely impact the asset quality of microfinance institutions,” he added.

“The pace of replenishment of cash supply in the system, the medium- to long-term impact of demonetisation on borrowers and the quality of customer engagement by the microfinance institutions will be the key determinants of asset quality in the future,” the Icra official said.

“Also, the extent of credit costs that microfinance institutions have to incur will depend on its share of affected portfolio, capital structure as well as loss-sharing arrangements,” he added.

Taking into account the expected increase in both credit costs and operating expenses, Icra has revised its profitability projections to sub-10 per cent for 2017-18 from 13-15 per cent estimated earlier.

Global Debt Hits 325% Of World GDP, Rises To Record $217 Trillion

While we eagerly await the next installment of the McKinsey study on global releveraging, we noticed that in the latest report from the Institute for International Finance released on Wednesday, total debt as of Q3 2016 once again rose sharply, increasing by $11 trillion in the first 9 months of the year, hitting a new all time high of $217 trillion. As a result, late in 2016, global debt levels are now roughly 325% of the world’s gross domestic product.

In terms of composition, emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. And, as has traditionally been the case, China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.

Joining other prominent warnings, the IIF warned that higher borrowing costs in the wake of the U.S. presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers.

Additionally, “a shift toward more protectionist policies could also weigh on global financial flows, adding to these vulnerabilities,” the IIF warned.

“Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs.”

For now, however, record debt despite rising interest rates, remain staunchly bullish and the equity market’s only concern is just when will the Dow Jones finally crack 20,000. 

Sadly, since we don’t have access to the underlying data in the IIF report, we leave readers with a snapshot of just the global bond market courtesy of the latest JPM quarterly guide to markets. It provides a concise snapshot of the indebted state of the world.