Tuesday, September 20, 2011

Today's links

1--The EU bank run, Credit Writedowns

Excerpt: There is a bank run now ongoing in Europe. Here’s how Felix Zulauf put it in May when he anticipated a bank run:

Felix Zulauf: Debt problems are never solved by more debt. In Greece, an epic drama is playing out. The Greeks are broke. The Irish are too. And the Portuguese are close...

Is that the full count of crisis countries?

No, it is missing Italy. Deposits are falling at their banks. We are experiencing a bank run in slow motion. Banks in Italy and in Spain are being refinanced with ever more short-term financing. Soon the biggest buyer of government bonds will be missing. This means that yields have to rise. And the bomb will explode in Italy this year already.

-Felix Zulauf turns bearish, expects major correction and QE3

The bank run soon was a reality in wholesale markets as US money market funds with significant exposure to commercial paper of European banks with significant exposure to the eurozone periphery pulled in their horns. See “Fitch: US Money Fund Exposure to European Banks Remains Significant” and “FT: Flight from money market funds exposed to EU banks” from late June for example....

Fast forward to Europe and we see exactly the same thing occurring now (hat tip Scott):

Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

In total, Siemens has parked between €4bn ($5.4bn) and €6bn at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

The bottom line: this is a classic liquidity crisis now not just for the sovereigns but the banks in Euroland as well. I would consider this a bank run via the wholesale funding market –

2--The world must insist that Europe act, Lawrence Summers, Financial Times

Excerpt: At every stage of this process, from the first signs of trouble in Greece, to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the stalemate machine. They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter....

A continuation of the grudging incrementalism of the past two years now risks catastrophe. What was a task of defining the parameters of “too big to fail” has become the challenge of figuring out what to do when important insolvent debtors are too large to save. There are many differences between the environment today and the environment in the autumn of 2008, or indeed at any other historical moment. But any student of recent financial history should know that breakdowns that seemed inconceivable at one moment can seem inevitable at the next...

There can be no return to the pre-crisis status quo. It is now clear that market discipline within monetary union is insufficiently potent and credible to assure sound finance. It is equally clear that the risk of self-fulfilling confidence crises becomes substantial when banks and sovereigns have no access to lender of last resort financing. The responsibilities of the ECB, national financial and regulatory authorities and EU officials can be defined in different ways. But there must now be simultaneously an increase in the central financial commitment to the financial stability of member states, and a reduction in their financial autonomy, if the common currency is to survive.

3--China bank stops FX swaps, forwards with some European banks, Reuters

Excerpt: A big market-making state bank in China's onshore foreign exchange market has stopped foreign exchange forwards and swaps trading with several European banks due to the unfolding debt crisis in Europe, two sources told Reuters on Tuesday.

The European banks include French lenders Societe Generale , Credit Agricole and BNP Paribas .

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

The Chinese state bank, a primary player in China's onshore foreign exchange market, has also stopped trading with UBS AG in the wake of that bank's $2.3 billion loss from a rogue trading scandal.

4--Dollar funding costs rise, Pragmatic Capitalism

Excerpt: European banks are finding dollars an expensive commodity once again, as the afterglow fades from a coordinated central bank plan to improve liquidity.

Swapping euros for dollars now costs about as much as it did before the European Central Bank said Thursday it would work with counterparts in the U.S., Europe and Japan to provide dollars for banks struggling to access U.S. currency. The three-month euro-dollar swap is quoted at minus 90.5 basis points, from minus 76.5 points on Thursday. The swap was at minus 92 points before the ECB announcement.

When European banks lose access to dollars, they have to issue debt in euros and swap it into US dollars, paying extra for this exchange. This extra amount is measured by the basis swap.

A growing belief that Greece will default on its debt–and uncertainty about the impact on other troubled euro-zone economies and banks–is once again driving up dollar funding costs. A teleconference between Greek officials and the troika of creditors–the European Central Bank, the International Monetary Fund and the European Union–is scheduled for later Monday to ascertain whether the country has done enough to get its finances back on track. At stake is the release of the next instalment of aid–EUR8 billion–without which Greece has said it will run out of cash by the middle of October....

The ECB’s dollar program has also failed to halt the trend toward shunning European borrowers in the commercial paper market, a trader at a primary dealer in New York said.

European firms, particularly banks exposed to Greek debt, are stuck with only the shortest-term loans unless they’re willing to pay high premiums.

“European names have headline risk so until the leaders of Europe come out with a plan, investors will stay away from European names,” the trader said.

The Markit iTraxx Europe Senior Financials index, another indicator of investor concern over European debt, is quoted at 286 basis points, up from 262 basis points on Friday. The index measures the cost of protecting against defaults on senior notes of European banks.

The cost of insuring European sovereign debt against default also rose significantly Monday.

5--Stock Fund Withdrawals Top Lehman at $75 Billion, Bloomberg

Excerpt: Investors have pulled more money from U.S. equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks.

About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.

Bears say investors are abandoning stock managers because there’s no end in sight to the decline that pushed the Standard & Poor’s 500 Index within 2.1 percentage points of a bear market in August. Bulls say the retreat by individuals has been a reason to buy since the bull market began in March 2009 and withdrawals mean money is available to buy stocks in the future.

“When we’re getting close to a market bottom, the phone starts ringing off the hook and our clients want us to sell everything,” Bruce McCain, who helps manage $22 billion as chief investment strategist at the...

Fund Outflows
About $177.7 billion has been removed during the past 30 months from mutual and exchange-traded funds that invest in U.S. shares as the benchmark gauge for American equity rallied as much as 102 percent, before falling 17.9 percent through Aug. 8. Investors pumped in $18.7 billion during the first four months of 2011, before removing about four times that amount since, according to the average of data from EPFR and ICI, the money managers’ trade group. The August estimate doesn’t include ETF data from ICI....

investors are withdrawing funds after companies beat profit estimates for 10 straight quarters. The world’s largest economy posted two years of growth and economists are calling for GDP to expand 1.6 percent in 2011 and 2.2 percent in 2012, according to the median estimates compiled by Bloomberg.

Hoarding Cash
Corporations have been hoarding cash and paying down borrowings. The S&P 500’s net debt to earnings before interest, tax, depreciation and amortization ratio is down to 2.5 from 5 in the second quarter of 2008, data compiled by Bloomberg show. This year’s earnings will increase 18 percent to a record $99.57 a share and break $100 next year, according to the data.

6--Euro Bulls Capitulating After Trichet Turnaround Leaves Redeker at $1.25, Bloomberg

Excerpt: Funds Cut Back

The cost for European banks to fund in dollars through the foreign-exchange swaps market rose the day following the coordinated central bank move. The price to convert euro-based payments into dollars, as measured by three-month cross-currency basis swaps, ended last week at 87.125 basis points below the euro interbank offered rate, or Euribor, from 81.91 the day before, according to data compiled by Bloomberg. The measure has expanded from less than 8 basis points in May.

A gauge of banks’ reluctance to lend in euros, the three- month Euribor-OIS spread, the difference between Euribor and overnight indexed swaps, ended last week at 75.25 basis points. While that is down from 84.6 on Sept. 12, the most since March 2009, it’s above the mean of 31.65 since the start of 2010.

The top 10 U.S. prime money-market mutual funds cut their assets invested in securities including commercial paper issued by European banks in July to the lowest level since 2008, according to Fitch Ratings....

Officials have contributed to investor skepticism. Bank of France Governor Christian Noyer said Sept. 12 that French lenders are capable of facing any Greek response to sovereign- debt difficulties and have no liquidity or solvency problems. Two days before Moody’s cut its long-term debt rating by one level, Societe Generale’s Chief Executive Officer Frederic Oudea told reporters on Sept. 12 that French banks “have no capital problem.”

“Policy makers and bank leaders have all come out and said ‘everything is fine,’ but clearly everything is not fine,” Louise Cooper, a market analyst at BGC International in London, said in an interview on Sept. 14. “The gap between the rhetoric and what the markets are saying about the level of the crisis is huge.”

7--Europe Bank Bonds Doubt Dollar Lending Success: Credit Markets, SF Gate

Excerpt: The cost to banks of converting euro payments into dollars, measured by the three-month cross-currency basis swap, ended the week at 87 basis points less than the euro interbank offered rate, five basis points higher than on the day of the central bank action. The rate was 7.625 basis points in May.

Greece, Portugal and Ireland have already been forced to ask for international bailouts, partly caused by losses by their banks, and government bond yields signal that the contagion is spreading to Italy, Spain and beyond....

Elsewhere in credit markets, a benchmark gauge of U.S. corporate credit risk climbed. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.8 basis points to a mid-price of 128.1 basis points as of 12:04 p.m. in New York, according to Markit Group Ltd....

"Large U.S. lenders are concerned about the creditworthiness of the bigger European banks," said Michael Derks, the chief strategist at foreign-exchange broker FxPro in London. "Some balance sheets are considerably worse than reported, they're under-capitalized and some are significantly under-capitalized."...

Credit-default swaps typically increase as investor confidence deteriorates and fall as it improves. They pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of bonds.

Cost of Dollars

The central banks' action helped ease concerns that troubled lenders will be forced to sell assets, as some did after the collapse of Lehman Brothers Holdings Inc. in 2008....
What policy makers were really trying to curb -- the cost of greenback funding for European banks -- rose over one year as well as three months.

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