The European Central Bank’s plans for €1 trillion of monetary stimulus is fraught with risk and is likely to fail without full-blown bond purchases, Standard & Poor’s has warned.
The agency said the ECB’s blitz of ultra-cheap loans to banks (TLTROs) cannot generate more than €40bn of net stimulus once old loans are repaid, given regulatory curbs imposed on lenders.
Jean-Michel Six, the agency’s chief European economist, said ‘doves’ on the ECB’s governing council know that the loan plan is unworkable but are going through the motions in order to persuade German-led ‘hawks’ that all conventional measures have been exhausted, even if this means a debilitating delay.
“Risks of a triple-dip recession have increased,” said Mr Six. “The ECB has one last arrow and that is quantitative easing of €1 trillion, needed to restore the M3 money supply to trend growth.”
European financial institutions have nearly doubled volumes of riskier debt deals as yield-starved investors are prepared to snap up racier assets in their struggle to generate a return.
Issuance of subordinated debt – which would suffer losses during a default before senior debt in a bank’s capital hierarchy – have risen by 80 per cent year on year to $122.4bn so far in 2014 according to Dealogic, the data provider.
The year-to-date total is the highest since 2007, before the global financial crisis.
Faced with record-low interest rates elsewhere, European banks have sought to capitalise on investors’ hunger for higher-yielding, though potentially more hazardous, assets according to Didier Saint-Georges, a member of the investment committee at the Paris-based fund group Carmignac Gestion.
“One of the objectives of central banks has been to encourage risk-taking, by crowding out investors from risk-free assets,” said Mr Saint-Georges. “For the banking sector, the impact this has on the relative attractiveness of each asset class is striking and it has become more difficult to pick winners with an acceptable risk profile and beat benchmarks.”>> Read More
The government’s austerity drive announced today, would lead to a saving of up to Rs 40,000 crore or 0.3 per cent of the Gross Domestic Product (GDP) but poses risks to growth, Japanese brokerage Nomura has said.
“On our estimates this would amount to a saving of Rs 35,000 to Rs 40,000 crore or 0.3 per cent of the GDP,” it said in a note issued here today.
The finance ministry issued a circular today instructing government departments to cut discretionary spending by 10 per cent. As part of these measures, it banned first class travel by government officials, meetings in five-star hotels, purchase of cars and froze new appointments.
Nomura said that the move may have been initiated as a precaution against potential shortfall in capital receipts, mainly disinvestment proceeds, where the government target is to raise 0.5 per cent of GDP or over Rs 43,000 crore.
Moreover, with reports saying that the government is looking at an additional capital infusion of upto Rs 11,000 crore into state-run banks, this could be undertaken with an eye on additional spending needs, it said.>> Read More
Fitch Ratings has placed France’s ‘AA+’ Long-term foreign and local currency Issuer Default Ratings (IDR) on Rating Watch Negative (RWN). The issue ratings on France’s unsecured foreign and local currency bonds have also been placed on RWN. At the same time, Fitch has affirmed the Short-term foreign currency IDR at ‘F1+’ and the Country Ceiling at ‘AAA’.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch’s sovereign rating on France was 12 December 2014, but Fitch believes that developments in France warrant such a deviation from the calendar and our rationale for this is laid out below.
Fitch will seek to resolve the RWN at its next scheduled rating review of France, with the outcome to be published on 12 December 2014.
KEY RATING DRIVERS The RWN reflects the following factors and their relative weights:>> Read More
In our view, the French government’s budgetary position is deteriorating in light of France’s constrained nominal and real economic growth prospects.
We believe that, due to policy implementation risk related to the budgetary consolidation and structural reforms, a recovery of the French economy could prove elusive and that France’s public finances might deteriorate beyond 2014, although this is not our base-case scenario.
As a result, we are revising our outlook on France to negative from stable and affirming our ‘AA/A-1+’ long- and short-term sovereign credit ratings.
The ratings on France remain supported by our view of the French economy’s high income per capita and productivity, its diversification, and its stable financial sector.
The rush of dollars into Indian debt continues with foreign investors having pumped in $20 billion so far in 2014, reports Aparna Iyer in Mumbai. This is twice the sum of the investments made by them in debt and equity in 2013. What will be heartening for the Reserve Bank of India (RBI) is that long-term investors such as sovereign wealth funds and pension funds have also been shopping for rupee bonds.
Data from the depositories show that such funds have exhausted 70% of the available $5 billion investment limit as of October 8; two months ago, only 45% of this limit had been used. On the back of such flows, the rupee has remained stable through the year, having gained 1.4% since January. On Thursday the rupee closed at 61.05 to the dollar.
With the quotas for gilts exhausted, foreign portfolio investors are lapping up high-yielding corporate bonds; around 47% of the the limit of $51 billion has been used up compared with just 40% two months ago. The improving macroeconomic data along with a stable government has seen India continue to attract dollars. Moreover, hedging costs have been coming off; the onshore three-month forward premium implied yield has fallen 20 basis points in the last one month.
Ukraine is likely to default on its debts next year when it breaches the conditions of a controversial $3bn bond held by Russia, allowing Moscow to demand immediate repayment and possibly triggering a wider default on all the country’s international debts, Moody’s has warned.
The rating agency notes that Ukraine’s deep 7.5 per cent economic contraction and wilting currency is likely to push its debt-to-GDP ratio up to 66 per cent this year – above the maximum 60 per cent ratio stipulated in the clauses of the Russian Eurobond that the last Kiev government sold to Moscow before the revolution.
When Ukraine’s debt-to-GDP ratio official breaches that level – possibly as early as January 29, when it is slated to release provisional fourth-quarter economic data – Moscow can ask for an immediate payment acceleration.
The final fourth-quarter GDP estimate is supposed to be published on March 10.>> Read More
Remember Greece: the country that in 2010 launched Europe’s sovereign solvency crisis and the ECB’s own helpless attempts at intervention, which later was “saved”, only to default shortly thereafter (but without triggering CDS as that would end the Eurozone’s amusing monetary experiment and collapse the Deutsche Bank $100 trillion house of derivative cards), which later was again “saved” when every single global central bank made sure Greek bonds became the only yield-generating securities in the world? Well, the country which at last count was doing ok, is about to not be ok. Because according to none other than S&P, at some point over the next 15 months, Greek debt is about to be in default when the country is no longer able to cover its financing needs. In other words, back to square one.
As Bloomberg reports, citing Real News, S&P analyst Marie-France Raynaud said Greece can’t cover its own financing needs.
How is that possible? Isn’t Europe so fixed, it no longer has anything to worry about except deflation, pardon, inflation?
Guesst not. According to Bloomberg, S&P estimates Greek financing needs for the next 15 months to be at EU43 billion.>> Read More