The introduction of negative interest rates a year ago by the Bank of Japan is prompting listed companies here to funnel the money they save on borrowing costs toward takeovers and capital investment.
The average borrowing rate of 1,387 nonfinancial companies listed on the first section of the Tokyo Stock Exchange and which released their third-quarter results by December 2016 has shrunk to an estimated 1.06%, down 0.11 percentage point from a year earlier. Interest-bearing debt has increased nearly 1 trillion yen ($8.84 billion) to about 207 trillion yen, while interest payment costs have fallen 10% to about 1.63 trillion yen. Some 30% of the companies have increased their borrowings.
Telecommunications giant SoftBank Group is one of the companies that has benefited the most from negative interest rates. Chairman and CEO Masayoshi Son bought British chip designer ARM Holdings for about 24 billion pounds ($29.8 billion) at the current rate in 2016 and has announced other bold global plans.
SoftBank’s interest-bearing debt has jumped 16%, or about 1.9 trillion yen, to a little more than 14 trillion yen over the past year. However, its average borrowing rate — obtained by dividing interest payment costs by average interest-bearing debt — was 3.53%, down 0.18 percentage point.
Negative interest rates have also lowered borrowing costs for corporate bonds. Borrowing costs for SoftBank seven-year bonds issued in April 2016 were 1.94% per annum, 0.19 percentage point lower than the cost for the seven-year bonds it issued six months earlier.
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
While Bank of Japan officials see no grounds for Donald Trump’s accusation of currency devaluation, they still worry that the bank’s unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.
“I have no idea what he is saying,” said one baffled BOJ official after learning about the criticism Trump leveled against the central bank.
Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% — the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.
BOJ Gov. Haruhiko Kuroda refuted Trump’s accusation in the Diet on Wednesday, saying Japan’s monetary policy is designed to defeat persistent deflation and not to keep the yen weak. “We discuss monetary policy every time Group of 20 finance ministers and central bankers meet,” he said. “It is understood among other central banks that [Japan] is pursuing monetary easing for price stability.”
In fact, U.S. monetary policy is chiefly responsible for the yen’s depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar — the higher-yielding currency — than the yen.
The US Federal Reserve will stop its mortgage and mortgage-backed security (MBS) reinvestments in April 2018 in order to prevent further expansion of its $4.2-trillion balance sheet, a negative signal to the US real estate market.
After the 10-year commercial mortgage-backed securities (CMBS) issued at the height of the mortgage meltdown in 2007 expire this year, real estate prices are likely to tumble due to a projected decline in effective demand. Higher Fed rates will also contribute to a contraction in demand as credit affordability is declining, meaning that already sky-high US property prices might be peaking.
According to Morgan Stanley, the termination of Fed MBS reinvestment will result in higher mortgage costs for consumers, falling in line with the gradual normalisation in the regulator’s interest rate policies.
“Applying this informal guidance to our expectation for the rates path leads us to believe the Fed will halt its MBS reinvestments in April 2018,” Morgan Stanley said. “Ending Treasury reinvestments is not necessary for a gradual normalization of the balance sheet; the economy should grow into the Fed’s Treasury portfolio within about a decade.”
The Fed has been relentlessly criticised by President Donald Trump and Republicans in Congress for having dramatically expanded its balance sheet during the past eight years to no avail as economic growth remains feeble and domestic US investment is low. While the new White House administration is tackling the issue of Fed independence, and the GOP-controlled House is weighing a Fed reform, the regulator might seek to reduce its bloated balance sheet as soon as it can.
Any substantial effort in this regard would likely not be feasible in 2017, as the refinancing of 10-year CMBS issued during the mortgage crisis will need Fed assistance. April 2018 is thus the earliest the regulator will be able to address the issue.
“We believe the FOMC will halt its reinvestments of MBS in April 2018, preceded by a ramp-up in messaging and an announcement at the March 2018 FOMC statement,” Morgan Stanley said.
Don’t anyone accuse Brazil’s central bank of not being bold.
In a unanimous decision, the bank cut its policy interest rate by 75 basis points on Wednesday, exceeding the consensus call for a 50bps cut and sharply picking up the pace on an easing cycle it began with two back-to-back cuts of 25bps each in October and November
In a statement, the bank said economic activity had fallen below expectations and that a recovery would take longer than previously anticipated.
It also noted data released earlier in the day showing inflation falling faster than expected to 6.3 per cent in the year to December 31 – the first time in two years it has been within the central bank’s target range of 4.5 per cent plus or minus 2 percentage points. Market economists expect it to end 2017 at 4.81 per cent, according to the central bank’s latest weekly survey.
The size of the cut will be welcomed by many, given the economy’s stubborn refusal to return to growth. The rebound expected by many when congress ditched president Dilma Rousseff last year has failed to happen. GDP contracted by 8 per cent over the past two years under Rousseff’s watch; her pro-growth, market-friendly successor, Michel Temer, was expected to turn things round quickly.
Details of the December 2016 ECB governing council meeting 8 December 2016
Main refi rate 0.0%
Dep rate -0.4%
Marginal lending facility 0.25%
QE kept at €80bn until April 2017 then will continue at €60bn until the end of Dec 2017, or beyond if necessary
Will comment further at the presser
Monetary Policy Decisions
8 December 2016
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
Eurozone finance ministers struck a deal in Brussels on Monday on short-term measures to lighten Greece’s debt burden, but the conclusion of the country’s second review of its third bailout and the participation of the International Monetary Fund have been deferred to January.
“The Eurogroup endorsed today the full set of short-term measures, including extending the repayment period and an adjustment to interest rates,” the Eurogroup said a statement.
The decision was seen to reward Greece for implementing the latest batch of reforms demanded as part of its bailout program.
The head of the European Stability Mechanism, Klaus Regling, said after the meeting that the short-term measures will start being implemented “in the next weeks.”
The measures, however, did not meet the demands of the IMF, which has demanded substantial debt relief and harsher austerity procedures in order to join the Greek program.
The credit-deposit ratio (CDR) of the banking system, or the proportion of deposits deployed as loans, dropped 155 basis points to 72.7%, the lowest in six years, in the fortnight ended November 11, data released by the Reserve Bank of India (RBI) showed.
The non-food credit growth during the fortnight hit an at least four-year low of 8.25% on a year-on-year basis, while food credit fell 14.3%.
The last time the CDR had seen a sharper drop was during the fortnight ended April 29, when it fell by 1.65% from the fortnight ago to 75.93%.
The sharp fall in the ratio was primarily because of a jump in the denominator, or a sharp increase in deposits with the banking system, which negated a fall in the credit outgo. During the fortnight under review, total deposits with banks rose by Rs 1.3 lakh crore, or 1.3%, whereas bank credit declined 0.8% to Rs 73.53 lakh crore.
The cash in hand with banks rose nearly 275% from the end of the previous fortnight to Rs 2.47 lakh crore, the highest in at least seven years.
The money parked by banks with the RBI through reverse repo operations under the central bank’s liquidity adjustment facility hit a record high of Rs 4.3 lakh crore as on November 22.
Just last week we noted that in the latest shocker to emerge out of corporate China, at least a quarter of Chinese companies were unable to generate enough cash to cover their interest expense: as we noted previously this is the Ponzi Finance stage of China’s debt curve, the one that comes just before the inevitable “Minsky Moment” at which point all bets are off.
The implications of this, for the nation with nearly $20 trillion in corporate debt as well as a grand total of 300% in debt to GDP are staggering: it means that sooner or later, up to a quarter of bank loan exposure will have to be discharged, restructured, equitized or otherwise eliminated due to its non-performing nature, dramatically impacting not just the asset side of the bank ledger, but the liabilities as well, namely deposits, which could see a drop in the trillion.
Overnight, in a report published by S&P Global, the rating agency’s analysts noticed not only the latest deterioration in corporate China, but also the relentlessly growing leverage, noting that rising debt levels will worsen the credit profiles of China’s top 200 companies, requiring the country’s banks to raise $1.7 trillion in capital to cover a likely surge in bad loans.Read More
Last week, we shared with readers a fascinating presentation that Bridgewater’s Ray Dalio made to NY Fed staffers at the 40th Annual Central Banking Seminar held on Wednesday, October 5, 2016. In it, Dalio pointed out that thoughts which dared to question the economic orthodoxy, and which were once relegated to the fringe blogs, have become the norm, pointing out that it is no longer controversial to say that:
…this isn’t a normal business cycle and we are likely in an environment of abnormally slow growth
…the current tools of monetary policy will be a lot less effective going forward
…the risks are asymmetric to the downside
…investment returns will be very low going forward, and
…the impatience with economic stagnation, especially among middle and lower income earners, is leading to dangerous populism and nationalism.
He further notes that the debt bubble which was not eliminated during the financial crisis of 2008, has since grown to staggering proportions, and notes that “the biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits.”
Alas, while the underlying symptoms are clear, that does not make the solution of the problem any easier. Quite the contrary. As Dalio further adds, “when we do our projections we see an intensifying financing squeeze emerging from a combination of slow income growth, low investment returns and an acceleration in liabilities coming due both because of the relatively high levels of debt and because of large pension and health care liabilities. The pension and health care liabilities that are coming due are much larger than the debt liabilities in most countries because of demographics – i.e., due to the baby-boom generation moving from working and paying taxes to getting their retirement and health care benefits.”
Here the Bridgewater head provides a simple explanation for why the system is unsustainable: debt is fundamentally a liability even though it is treated as an asset by those who “own” it. As a result, “holders of debt believe that they are holding an asset that they can sell for money to use to buy things, so they believe that they will have that spending power without having to work. Similarly, retirees expect that they will get the retirement and health care benefits that they were promised without working. So, all of these people expect to get a huge amount of spending power without producing anything. At the same time, workers expect to get spending power that is equal in value to what they are giving. They all can’t be satisfied.”