Friday, 8 July 2016

The financial meltdown - 07/07/2016

Europe's Bank Crisis Arrives In Germany: €29 Billion Bremen Landesbank On The Verge Of Failure€29-billion-bremen-landesbank-verge-failure

When most recently reporting on the latest European banking crisis, yesterday we observed a surprising development involving Deutsche Bank, namely the bank's decision to quietly liquidate some of its shipping loans. As Reuters reported, "Deutsche Bank is looking to sell at least $1 billion of shipping loans to lighten its exposure to the sector whose lenders face closer scrutiny from the European Central Bank. 

"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment."

This confirms what had long been speculated, if not confirmed, namely that German banks have been some of the biggest lenders to the shipping sector, a sector which has since found itself in significant trouble as a result of the ongoing slowdown in global trade.

And now, it appears that some shipping loans gone very bad could be the catalyst for Europe's banking crisis to finally breach the most impenetrable border of all, that of Germany.

Because it is in Germany where we find what may be the next domino to fall as part of Europe's latest banking crisis incarnation: Bremen Landesbank.

Several weeks ago, the FT reported that the German Landesbank NordLB was considering taking full control of its smaller peer Bremer Landesbank (BLB), which is struggling under the weight of a portfolio of bad shipping loans. BLB, in which NordLB already owns 54.8%, warned last week that it would have to take a €400m writedown on its shipping portfolio, and that as a result it was facing a “mid-triple-digit million loss” this year.

As the FT added, the admission prompted concerns about the health of the Bremen-based bank, which had €29bn in assets at the end of 2015, and BLB’s owners have since been holding talks on how to bolster the stricken lender’s capital position.

In a statement made one month ago, NordLB’s chief executive, Gunter Dunkel, and Bremen’s finance minister, Karoline Linnert, said that BLB’s owners NordLB, the city of Bremen, and the savings banks association in Northrhine Westphalia — had agreed to keep BLB’s capital “intact at an appropriate level”. "The form and size of the capital increase are currently being intensively discussed,” NordLB and the city of Bremen said. “The necessary decisions will be carried out by the end of 2016.”

The market quickly read, and internalized the news, then promptly moved on: after all, with a bigger backer set to rescue the bank, there is nothing to worry about.
Just one problem: that may no longer be the case.

In an article released moments ago by Germany's Handelsblatt titled a "Capital increase for ailing Landesbank is questionable", the German paper writes that "shipping loans have brought Bremer LB into distress and the bank can not survive without government help, but a direct capital injection from Lower Saxony now looks unlikey."

The punchline, and where the narrative veers dramatically from the smooth sailing scenario presented last month by the FT, is that according to "Lower Saxony' President Stephen Weil, a capital increase by his state and Bremen for the ailing bank is currently not realistic. "The classic method, namely when partners provide the necessary capital, does not seem to work," the Prime Minister said to the "Weser-Kurier". But, he added, "we will make every effort to save the Bremer Landesbank."

Bremer LB's sudden fall from bailout grace appears to be the latest result of political conflict, because as Handelsblatt notes, Weil was responding to remarks by his colleague Carsten Sieling (SPD), who excluded capital support for the BLB. In a scenario that Italy is all too familiar with, Sieling said that such an action would not be in line with EU requirements.

In other words, Germany may now find itself in the ironic situation that its own bailout intransigence will force it to engage in a bail in for one of its bigger banks.
To be sure, it is possible that a solution is found, and Merkel will need to concede to not only a Bremen LB bailout, but one of Italy as well, as the two would go hand in hand. On the other hand, it just may be the case that Germany refuses to save even one of its own.

And while the final outcome remains uncertain, the market quickly read between the lines and responded in preparation for a worst-case outcome: in intraday trading the bank's "equity-like" 9.5% Contingent Convertible bond of 2049 has plunged by almost half from 120 to 73 in minutes, a move which has likewise spooked broader global markets.

Sovereign Credit Is Deteriorating At A Record Pace

7 July, 2016

Culminating with the tipping of the UK's numerous real estate fund "dominoes" and the subsequent fallout in the wake Brexit, Fitch has been on a ratings-slashing spree, having cut the credit ratings on 14 nations so far in 2016, most recently that of the United Kingdom - a record downgrade pace for the rating agency. As the FT reports the majority of those 14 nations are concentrated in the Middle East and Africa: areas that have the most exposure to slumping commodity prices and declining nominal exports. Fitch also downgraded the UK citing falling oil prices, a stronger US dollar and Britain’s pending exit from the EU.

The decline in global sovereign ratings highlights the sensitivity to geopolitical shocks felt by the world economy as a result of sluggish growth and rising debts, Fitch notes.
Fitch's competitor S&P has cut 16 sovereign ratings, a number only exceed once prior and that was during the EU turmoil in 2011. Moody's registered 14 downgrades in 2016, up 4 from this same period last year.

"So far this year, S&P has downgraded 16 sovereigns — a half-year figure only exceeded once, at the height of the eurozone crisis in 2011. Moody’s has downgraded 24, compared with 10 at the same point last year."

On Europe, Fitch had this to say: “Europe’s political backdrop could have negative implications for sovereign ratings . . . Comparatively high government debt levels are observed in several eurozone sovereigns, and are likely to remain effective rating constraints.”

Not even Saudi Arabia was safe. Fitch downgraded the kingdom on April 12, 2016 citing weakness in oil prices. The downgrade took place after oil had already rebounded roughly 40% from the February low. Fitch also stated their target for oil at the time of the downgrade was $35 for 2016 and $45 for 2017.

To be sure, timing of downgrades is not something the ratings agencies are known for.
Neither is competence. The role of credit rating agencies has been questioned in recent years — with some accusing them of biased ratings and irrelevance. However, their decisions remain crucial to investors subject to mandates that determine what sort of assets they can own. “I see parallels between the downgrades in peripheral Europe during the eurozone crisis and what is happening in emerging markets right now,” said Bhanu Baweja, emerging market strategist at UBS."

Nonetheless the rates still provide a template of how other credit managers think, even if the warnings are largely and when it comes to purchasing decisions, completely ignored, drowned out instead by the actions of central banks. In today's new normal, in the midst of low yields and high leverage, there is a major "crowding" effect as investors turn to those places which still provide some relatively higher yield, regardless of underlying fundamentals and if better yields are to be found in sovereigns with insurmountable debt, then that's where "other people's money" will head for. After all, the thinking goes, by the time the sovereign defaults, it will be someone else's problem.

It’s a very strange time — the credit is undoubtedly weakening but investors are still crowding in because there are so few places to find positive yields.” The crowding has caused the average borrowing rate of emerging markets calculated by JP Morgan's index of EM bond yields to fall to a two-year low of 5.25 per cent.
“The problem is growth,” said Mr Baweja. “It is so weak that leverage is increasing and credit is weakening. 
This doesn’t mean there is a crisis but it does mean we haven’t seen the last of the downgrades.
The full list of downgrades YTD:

A 2014 white paper by Heitor Almeida and company reviewed the real effect of Sovereign rating downgrades. Almeida finds that downgrades only exacerbate the financing issue that sovereigns find themselves in when a downgrade happens. Almeida says "We find sovereign downgrades lead to greater increases in the cost of debt and greater decreases in investment and leverage of firms that are at the sovereign bound relative to similar firms that are below the bound."  The paper also noted an increase in corporate downgrades the month of and in the months following a sovereign downgrade.

Then again, 2014 was long ago.  Now that $11 trillion in debt trades at a negative yield, the worse the sovereign, the more attractive its higher yielding bonds. Of course, they are yielding more for a reason, but when the world is floating on a sea of $15 trillion in excess liquidity, who needs to bother with such trivialities.

Trends This Week – Hillary Clinton latest to prove different justice scale for the elites – 07.06.16

Global forecaster Gerald Celente rips into the decision not to prosecute Democratic presidential candidate Hillary Clinton for her email scandal, demonstrating once again two scales of justice: One for the elites, one for the rest of us. Elsewhere, Celente analyzes market indicators in the aftermath of Brexit. Global equity markets are in turmoil. However, the business media’s view of market mayhem is a snapshot in time dating to the June 23 “Brexit” when the United Kingdom voted to exit the European Union. Indeed, while Brexit triggered the current turmoil, Celente's trends-eye view identifies the current market volatility in a Globalnomic® context far bigger than Brexit

Keiser Report: Jumping Brexit Ship

In this episode of the Keiser Report from Washington DC, Max and Stacy discuss the threats to the global financial system posed by Deutsche Bank and all Italian banks. In the second half, Max interviews Rob Kirby of Kirby Analytics about Deutsche Bank’s massive derivatives book

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