S&P Warns That Most Global Banks are Still Unsafe

November 30, 2009

Telegraph.co.uk

By Ambrose Evans-Pritchard

Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short.

The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).

While some banks may look healthy under normal Tier 1 and leverage targets, critics claim these measures can be highly misleading since they fail to discriminate between high-risk and low-risk uses of leverage. The system failed to pick up the danger signals before the financial crisis. The supposedly moderate leverage of US banks in 2007 proved to be a spectacularly useless indicator.

S&P has shifted to a tougher code. It is less tolerant of hybrid capital – a liability rather than an asset, and no defence in a crunch – and insists that banks must quadruple capital put aside to cover trading desks. Private equity exposure will be treated more harshly.

The Bank for International Settlements unveiled its own version in September. The regulatory framework worldwide is clearly shifting in this direction, a move that will hit some banks harder than others. “We expect banks to continue strengthening capital ratios over the next 18 months to meet more stringent requirements. Failure to achieve this could put renewed pressure on ratings,” said Bernard de Longevialle, S&P’s credit strategist.

Tougher rules at this juncture may prove “pro-cyclical”, if banks respond by cutting loans. This may perpetuate the credit crunch for smaller borrowers unable to tap the bond markets. “There is a risk that the increase in regulatory capital requirements could weigh on banks’ ability to finance recovery,” said Mr de Longevialle.

The “safest” global bank is HSBC (9.2), followed by Dexia (9.0), ING (8.9) and Nordea (8.8). UK banks fare relatively well: Standard Chartered (8.1) is in the top quintile; Barclays (6.9) is in the middle. The study left out RBS and Lloyds because their status is unclear. Chinese banks – the world’s largest – were excluded.

Many banks on the sick list are already cleaning up their books, mostly by disposing of assets or converting hybrids into common stock. Citigroup exchanged $64bn (£38.5bn) of hybrid equity in the third quarter. UBS has cut reliance on hybrids, still 80pc of its capital earlier this year.

Japanese banks score worst because they rely on hybrids and are major players on the stock exchange, buying equities at 12 times leverage. Equity portfolios make up more than 50pc of their capital. This could prove troublesome given Tokyo’s bourse has fallen this year, missing out on the global rally.

German banks do poorly because they have large holdings of asset-backed securities (ABS), often toxic. US banks look healthy in terms of leverage, but look less pretty when this is adjusted for risk.

S&P said past focus on leverage alone had been a recipe for trouble. It encouraged banks to opt for dodgy products – treated as if equal to top-notch sovereign debt – and could be circumvented “off-books” in any case. Rules created the illusion of safety.

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Cuban Blogger Seized From Streets, Beaten & Released

November 9, 2009

NBC Miami

By Janie Campbell

Was it something she spelled?

Trail-blazing Cuban blogger Yoani Sánchez says she was headed to a peaceable march against violence with friends in Havana Friday when she and fellow writer Orlando Luis Pardo were confronted by three men in plainclothes presumed to be state security, forced into a car, and assaulted.

“No blood,” she reported to El Nuevo Herald. “But black and blues, punches, pulled hairs, blows to the head, kidneys, knee and chest…[after being] thrown head-first inside, they applied judo or karate holds to us and the punches . . . kept raining down.”

Sánchez says she and Pardo were driven around for about 20 minutes before being “violently thrown on the street” near where they were first accosted. Their friends reported being taken to a police station in a second car, where they were questioned and released.

The group was en route to an event its organizers, local musicians, termed “a peaceful performance-march — neither a protest nor a political demand.” A previous gathering had included group theatre but was uneventful.

Since she began signing her name to blog posts she composes in Cuba and e-mails to friends in other countries for publication, Sánchez has received critical acclaim and several awards for her social commentary and missives about every day life on the island from the government to food to baseball. Though awarded Spain’s Ortega y Gasset Journalism Award and Columbia University’s Maria Moors Cabot Prize, she has been denied permission to leave Cuba to accept. In 2008, Sánchez, a philologist by training, was named one of TIME Magazine’s 100 Most Influential People.

Sánchez said the motivation behind the “professional violence” was “evidently” to keep her from participating in the anti-violence march. “Anything else would be pure speculation.”

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Fiscal Ruin of the Western World Beckons

July 18, 2009

Telegraph

By Ambrose Evans-Pritchard

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. “The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb”, said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

“Something has to give,” said Professor Colm McCarthy, the report’s author. “We’re borrowing €400m (£345m) a week at a penalty interest.”

No doubt Ireland has been the victim of a savagely tight monetary policy – given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a “penalty interest” on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

“The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever,” said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy’s debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France’s debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his “Grand Emprunt”, a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura’s Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan’s Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l’outrance.

Such policies have crippled Japan. A string of make-work stimulus plans – famously building bridges to nowhere in Hokkaido – has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan’s gross public debt will reach 240pc of GDP by 2014 – beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan’s bond market will blow up.

Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary “shock and awe” through quantitative easing.

The US Federal Reserve has moved faster but already seems to think the job is done. “Quantitative tightening” has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of “exit strategies”.

Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.

The Fed’s doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

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