Category Archives: Financial Crisis

Russia’s state banks are rotten | Business New Europe

Banks epitomise capitalism, but not in Russia. The financial industrial empires of men like JP Morgan, Rockefeller, Rothschild and Harriman are intimately tied up with creating the vibrant no-holds-barred capitalism in the US. In Russia the top five banks are all state-owned and their power comes largely from one man – Russian President Vladimir Putin.

The Russian economy is in recession and most of the important state-owned banks are under sanctions imposed by the US and Europe. Never particularly well run, the current environment means the tide has gone out for Putin’s “state capitalism“ system and it is apparent that several of these banks were not wearing swimming trunks. As the first quarter reporting season comes to an end, all Russia’s large state-owned banks admitted they are struggling.

What now?

With the banks in such a terrible state, the question is what happens now? The CBR’s emergency hike in interest rates to 17.5% in December made the cost of capital unaffordable to potential borrowers and while the central bank has reduced the rate several times since then into the low teens, it is still very expensive. Bank’s lending business, their main form of income, has collapsed as a result.

So far, the CBR has stepped in to provide funding and seen its share of liabilities rise to 11% of the banking sector’s total (in 2008 at the peak of the crisis the CBR accounted for only 3% of total funding). And the lucky few that have access to the state-directed loans are enjoying subsidised loans well below market rates. But the CBR can’t keep this up forever.

The Russian economy has been surprisingly robust in the face of Western sanctions and the ruble’s collapse, and it could even return to growth by the start of next year, so there is light at the end of the tunnel. If there is a “snap-back”, then many loans that were previously impaired could, once again, look profitable. On the other hand, if the outlook for the Russian economy remains bleak, then the situation in the financial sector could spin further out of control.

Russia’s state banks are rotten | Business New Europe

The Worst Is Yet to Come: Greece and Europe’s Economic Woes Aren’t Over | The National Interest

More frightening, this weakness in the system of official support leaves a potential for considerable harm should Italian, Spanish or other depositors in Europe’s periphery follow the Greek example. Even with great faith in their government’s commitment to the euro, Italians, Spaniards and others still might take their money out of local banks just to play it safe. There is, after all, little cost to such a move. Should such outflows gain momentum, little could be done to save these countries from a shortage of liquidity, with all the associated economic and financial harms that would go with it. These nations would then have still more trouble making good on their debt obligations, and the ECB would have to struggle still harder to support their finances.

Such trends could, in the extreme, precipitate a full-blown financial crisis. Widespread concern over bank illiquidity would cause doubt about the ability of banks to fulfill their obligations. People and other institutions would then shy away from transacting any business with them. And since no one could know which firms had liquidity problems, that wariness could extend to just about all. Financial flows could then freeze up, shutting down the great amount of economic activity that depends on them. This is exactly what happened in the United States in 2007-08, when a similar wariness developed around each firm’s exposure to subprime loans. If the cause this time in Europe has different roots, the result could well be the same. And because all financial institutions in the world deal with each other, the situation would quickly spread around the globe, as America’s financial problems did seven years ago.

The Worst Is Yet to Come: Greece and Europe’s Economic Woes Aren’t Over | The National Interest

Greece’s crisis has almost reached the point of no return – The Washington Post

At some point, the unthinkable becomes the inevitable. That moment—leaving the eurozone—may be coming for Greece now that its latest bailout battle with Europe has degenerated into the fiscal equivalent of trench warfare. It’s bad enough that Greece’s ruling party, Syriza, has resorted to calling a referendum next Sunday on whether or not they should accept Europe’s terms.

If Greece votes Yes, there would probably be new elections and another bailout. But if Greece votes No, it would probably have to ditch the euro and bring back its old currency, the drachma. In the meantime, though, Athens is closing the country’s banks, and preventing people from moving much money abroad in a capitulation to the panic gripping its financial system. That became its only option after the European Central Bank announced on Sunday that it wouldn’t approve any more emergency loans to Greece’s banks.

Greece’s crisis has almost reached the point of no return – The Washington Post

Puerto Rico says it cannot pay its debt, setting off potential crisis in the U.S. – The Washington Post

The governor of Puerto Rico has decided that the island cannot pay back more than $70 billion in debt, setting up an unprecedented financial crisis that could rock the municipal bond market and lead to higher borrowing costs for governments across the United States.

Puerto Rico’s move could roil financial markets already dealing with the turmoil of the renewed debt crisis in Greece. It also raises questions about the once-staid municipal bond market, which states and cities count on to pay upfront costs for public improvements such as roads, parks and hospitals.

For many years, those bonds were considered safe investments — but those assumptions have been shifting in recent years as a small but steady string of U.S. municipalities, including Detroit, as well as Stockton and Vallejo in California, have tumbled into bankruptcy.

Puerto Rico says it cannot pay its debt, setting off potential crisis in the U.S. – The Washington Post

BlackRock: Soaring Chinese debt a major concern – Business Insider

While the rapid acceleration in debt issuance initially fuelled economic growth, Blackrock says it’s now losing its potency to spur increased economic activity.

“China has been taking on increasing amounts of debt to maintain growth. Yet it has been getting less bang for its yuan as growth has edged down. Credit growth is not just losing its potency; it is turning into a poison. Debt is growing faster than borrowers’ ability to service it. The resulting debt mountain stood at $28.2 trillion at the end of 2014, according to a McKinsey report. The debt cannot be rolled over indefinitely. China’s debt-to-GDP ratio has reached almost 300%. Government debt makes up a relatively small share of the total, with the bulk in the corporate sector”.

While the debt burden is creating amplified financial risks, Blackrock believe the fallout of any potential debt crisis could be limited by the Chinese government’s effective ownership and control of the nation’s banks, and the fact China’s economy is still a relatively closed.

BlackRock: Soaring Chinese debt a major concern – Business Insider

‘It’s time to hold physical cash,’ says one of Britain’s most senior fund managers – Telegraph

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

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Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

“Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

‘It’s time to hold physical cash,’ says one of Britain’s most senior fund managers – Telegraph

The China Bubble Is Going to Burst – Bloomberg Business

“It smells like a bubble, it looks like a bubble, and it walks like a bubble,” Morilla-Giner said in an interview on Bloomberg Television in London. “Steer clear, that is the trade.”

It’s no longer a question of whether China’s stock-market rally is a bubble, but when the bubble will burst.

That’s the refrain from a growing number of analysts as valuations climb to levels that by some measures already exceed the peak of China’s last equity mania in 2007.

A market crash may come within six months, Bocom International Holdings Co. said Tuesday, citing an analysis of global bubbles over 800 years that shows the speed of gains in China mirroring past market peaks. Macquarie Investment Management, whose Asian stock fund is outperforming 97 percent of peers in 2015, has already eliminated exposure to mainland shares after turning bearish for the first time in seven years. The government may engineer a correction if valuations rise much further, according to CLSA Ltd.

The China Bubble Is Going to Burst – Bloomberg Business

In A.I.G. Case, Surprise Ruling That Could End All Bailouts – The New York Times

The judge’s decision could have far-reaching consequences should another financial crisis occur — and if history is any guide, one will. Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted.

Should that happen, and the government decides it is handcuffed by the law from any intervention, taxpayers can thank Maurice Greenberg, the company’s former chief executive and one of its largest shareholders. He sued the government on behalf of shareholders, contending its takeover was illegal and unfair to investors. The judge largely sided with Mr. Greenberg, confounding many legal experts who considered the case a long shot. A federal judge had previously thrown the case out of court, calling Mr. Greenberg’s accusations “worthy of an Oliver Stone movie.”

In A.I.G. Case, Surprise Ruling That Could End All Bailouts – The New York Times

“Ex-A.I.G. Chief Wins Bailout Suit, but Gets No Damages.”

“Maurice R. Greenberg, the former chief of A.I.G., argued that the Fed overstepped its bounds.”

AIG deserved to fold. Saving companies like this just facilitates the next big crash. Let ‘em go under so pain is appropriately measured out. Many of the employees will find jobs in other companies – better run companies.

Basically, the idiots at AIG sold credit default swaps. The head of this unit called it free money. They made a basic modeling assumption error – there is no such thing as herding. Unfortunately, the real world is not so neat and clean. Do wall street firms still assume that there is no herding? Well, I’m glad you asked. Indeed, everyone is still making that assumption. Every time somebody uses the normal distribution in a math model they are assuming no herding. Although, they probably gave no thought to the herding issue.

 

Could China Spark the Next Global Financial Crisis? | The National Interest

Are we heading toward a “global financial crisis with Chinese characteristics” thanks to a property market collapse?

China’s slowing property market has forced Beijing to put its foot on the policy gas pedal, worried as it is by the effects of a deepening slump. For a government whose legitimacy is based on economic growth, the consequences of the property bubble bursting could be far-reaching, threatening not only China, but the region and beyond.

“Once expectations change, the high vacancy rate will put lots of pressure on prices and could see them collapse,” he told the Australian Financial Review. “A cold winter for the Chinese housing market is coming.”

That winter has already arrived, with the Chinese property market continuing to weaken in 2015. …

Chinese domestic investors are now pouring their money into stocks, with both the Shanghai and Shenzhen bourses doubling in value over the past year.

With China’s property market having apparently burst its bubble, will Chinese stocks be next? The consequences could be earth shattering for more than the Middle Kingdom.

Could China Spark the Next Global Financial Crisis? | The National Interest

“We [Russia] are now in a full-fledged crisis,” Kudrin said. “The situation in the real sector is still very bad.”

Russia will endure a longer recession than forecast by the government, former Finance Minister Alexei Kudrin said, urging the central bank to refrain from further interest-rate cuts as economic risks persist.

Gross domestic product may continue shrinking into the first quarter of next year, putting the economy on track for zero growth in 2016 after a slump of about 4 percent in 2015, Kudrin said in Moscow on Wednesday. Kudrin, 54, took issue with the contention by government officials that Russia has put the worst of the economic crisis behind it and warned that companies are only now beginning to feel the pain of collapsing demand.

“We are now in a full-fledged crisis,” Kudrin said. “The situation in the real sector is still very bad.”

The assessment by the long-time ally of President Vladimir Putin is at odds with government expectations for a quick economic turnaround as the world’s biggest energy exporter succumbs to its first recession in six years. While the ruble rebounded this year and GDP shrank less than forecast in the first quarter, consumer demand and investment are reeling and industrial production dropped for a third month.

Russia in Full ‘Crisis’ to Kudrin Forecasting Longer Recession – Bloomberg Business