1. Spanish borrowing costs get
relief but banks remain under pressure. Will Euro bank reform provide direct
infusion? http://ht.ly/dLeaY #sbfi
Executive suite 23 September 2012
In anticipating Eurozone banking reform, we
need to learn the word "patience". We have yet to know how the latest
changes will pan out eventually. But they have made some important strides.
One is ECB will purchase unlimited amount of
bonds of ailing countries; But there will be string attached, that is a bank
supervision body set up for surveillance work. That changes substantially the
structure and power of ECB.
These are positive steps. Lowering borrowing costs will
be congenial to ameliorate the current crisis. It strengthens the governance in
a prostrate and slovenly Eurozone. It is unknown how the Eurozone countries
will react to losing some sovereignty. However, strong governance will curb
feckless countries talk the talk, but can’t walk the walk; the move will help
the early recovery of Euro zone.
2. Spanish bonds sold for record 7.18%, an unsustainable level that deepens crisis. How to restore market confidence? http://ht.ly/bFM9q #sbfi (CEO,COOCFO) 25 June 2012
The spike of bond yield shows the bank
recapitalization in a wrong way. It reflects the risk premium of the
dangerously high government debts to GDP (Spain’s public debt to GDP has raised
to 80.1% since 2007, if adding another 100 billion loans, debt level goes up to
90 to 100%). Its resolve to tackle banking woes; country in deep recession;
regional government funding drying up; and high unemployment all add up and
exacerbates the economic crisis that worsening the assessment.
Three Remedies are thoughts to restore market confidence:
1. recapitalization: After external audit and stress test, there should have an estimated amount for injected fund, as what I mentioned in my previous comment, it should come from EFSF or ECB direct lending, rather through government borrowing, cutting out insidious close symbiosis between government and banking systems, preventing private debt becomes public pain. I read a piece of Reuter news today, Mrs. Merkel refused to loan direct to banks, if Germany couldn’t monitor utilization of their taxpayer’s money. Spain should learn to let private bank to shoulder the burden, and giving lender to safeguard their lending money.
It has been in my mind whether US bailout their banks was a success in 2008 financial crisis. It is mixed. In one way, it averted a full-blown financial crisis. In the other way, the bailout became a moral hazard; it rescued unappreciative beasts that lobbied legislators to dodge the passage of law, such as the Dodd-Frank's "Volcker Rule". Banks taken the advantage of the bailout, lobbied in the guise of “free market economy” to move away hindrance impeding them making more money.
What was worse, bank’s executives were so keen to get rid of the portion they were hemmed in owing to the government, unencumber them to revert to the old days paying them swingeing compensation. They disposed-off assets; it was not clear whether with the shareholder value in mind or feeding self- interest. So, while the Spaniard shouted why Spanish government lavished advantage to bailout bank? I sympathized with them. It created grossly egregious social injustice when ordeals of many living below subsistence level struggled to live their lives. American system provided the incentive fast enough to return the bailout funds but also satiated the capricious banker’s appetite.
We always adopt a putative utilitarian view to prevent cataclysmic consequences. Letting banks fail is not an option and is inimical if the contagion becomes systemic, the temptation to bailout is strong when the economy is in dire straits; those are why bank’s fiscal rectitude is at all-time important, and regulation is a way to stow bank to adhere to fiscal discipline, judiciously taking calculated risk only within bank’s capacity, refrain to act recklessly resulting financial woes.
2. Tackle head-on non-performing loan. It is estimated that troubled real estate asset amounting to € 184 billion, and is centered on Bankia. In my previous comment, I mentioned “The solution to the imminent banking crisis is to strengthen bank’s governance. Letting banks unencumbered by mortgage loans start a clean slate afresh by cordoning and purchasing all non-performing assets in one portfolio, governed by an entity (similar to bad bank); so as to lift the unconscionably low market confidence (resolving problems like banks have adequately injected fund and made bad loan provisions), and that the lifeblood of the economy starts working again.” This is an important step that cannot afford dilly-dally attitude.
3. Promoting
growth initiatives: Up till now, there is litany of debate with disparate views
among the European leaders as to how to stimulate the economies of Euro zone to
promote growth, and have no consensus view. I read some interesting articles,
saying that from 2007 to 2011, Spanish government spending as a percentage of
GDP has increased by 4.4%, more than double the equivalent measure in Germany,
however, the spending has bungled, it does not resulting in lifting the wilting
economy. Another article stresses why infrastructure spending is not effective
to stimulate economy in Europe.
Promoting
growth does not necessary pouring monies to build roads or bridges bither and
yon to nowhere. It is all about country economic strategy. Where you want to go
from here? How the strategic projects promote economic prosperity in the future
and creating jobs. So, countries in Euro-zone should have their blueprints of
economic plans and start working from there.
Leaders in Euro zone should coordinate their efforts of member countries
to make use of existing capabilities and infrastructure to promote growth, such
as pan-southern Europe tourism promotion. Some strategic projects will take
time to bear fruits, but approach like this can easily see immediate effects.
3.Economist magazine points all eyes onto Angela. Can Merkel come around to lead a consensus rescue and save Euro? http://ht.ly/bwko3 #sbfi CEO/CIO/COE/COO 16 June 2012
It is a political game.
The stalemate originated from different ideologies, political interests in the stake of the game. The ideologies stem from the German adheres to the “not to bailout” principle, let the creditors fail and bear the loss, this is in congruent to the treaty, their constitution.
Second, is the possible political backlash, most Germans are of the view that to use their hard-earned money to rescue the profligate southern members is the greatest sin. Mrs. Merkel’s reticence must have taken these into consideration.
Of course media accused of German banks’ reckless lending originated the woes and Greece should not be admitted at all to the Eurozone. The German is culpable to clean-up the mess. There are some truths to this shortsightedness from hindsight. They (The German) were long of ambition short of calculated risks.
Mrs. Merkel is the proponent of “More Europe”, “More politically integrated Europe” which will strengthen her leadership, but other member countries are reluctant to surrender sovereignty. They want more money injected to their ailing economies, not a hand into their internal affairs. The German is reluctant to open the money spigot if members do not demonstrate they are committed, and where is the pit to satiate the voracious appetite? These are the fears any sane lender should have. A diverse interest group limits the way how it responds to crisis.
She disparaged the idea of Eurobond, in her view would serve as disincentive to continue reform. The larger issue probably is it jeopardizes Germany guarded credit rating; the ramification probably will be political backlash, too big a cost that she rejected vehemently. The deposit insurance I think is an easier part, the cost is negligible, and it serves as backstop for bank runs. If there were none, probably there will be no costs.
4. The euro crisis: How to save Spain (Finance club) 4 June 2012
The comment above was posted in this group before; I
posted again because I thought it was still relevant to proceed apace going
forward. I am writing now for the teetering on the brink and fermenting
liquidity banking crisis.
The financial world is rife with great uncertainty in
a funk. It goes without saying because there is no transparency as to how Spain
secures the source of funding (EFSF or ECB?) and by how much to inject into the
banking system that currently hang in the balance. Spain is the fourth largest
economy in Eurozone that carries weight; the unknown factors escalated the
financial risk, epitomized by accelerated interest rate on government bond to
6.45%.
The banking crisis is not as sophisticated as the
Subprime crisis in the US, although they are same in way that there are big
holes in banks’ balance sheet due to falling assets price (falling value of
real estate mortgage and holding of government bonds for Spain’s banks).
Difference in ways that The US was self-funding (by printing monies) and
banking crisis was exacerbated by subpar slapdash lending practices and
sophisticated synthetic financial instruments (such as CDOs).
The perennial problem of Spain’s banking system is
characterized by insidious close symbiosis between government and banking
systems. The banks are mangled to purchase government bonds if funds are
available from ECU which clouts out funds channeled to business sector to
pursue economic growth. It becomes an unruly vicious cycle: weak public finance
is causing funds being channeled to government for firefighting own use rather
than inject into the economy for more productive use to boost business growth,
The solution to the imminent banking crisis is to
strengthen bank’s governance. Letting banks unencumbered by mortgage loans
start a clean slate afresh by cordoning and purchasing all non-performing
assets in one portfolio, governed by an entity; so as to lift the
unconscionably low market confidence (resolving problems like banks have made
adequate fund and bad loan provisions)that the lifeblood of the economy starts
working again. This will require an audit of banks’ balance sheet to determine
amount needed for injection.
The funds required for running public service are
judgment call, ineluctable either from tax revenues, selling unutilized, and
loss making public assets or issue of government bonds selling to ECB. The
litmus test is a break out of the vicious cycle enigma to restore confidence
and stop the self-perpetuating banking problems.
5."Spanish austerity continues as recession deepens and
interest rates climb. How long will Berlin keep pushing? http://ht.ly/akA5S
#sbfi" CEO/ CIO/COE/COO/CFO/Head/VP/
Director/President Level - Senior Leadership Group
20 April 2012 CFO network finance plus 28 April 2012 Finance club 29
April 2012 Execu Net 4 May http://www.linkedin.com/e/-vo80fz-h19gkdg9-5w/vaq/108763676/93469/77471489/view_disc/?hs=false&tok=0iRycuehwxvBc1
Spain's debt problems stemmed from prior to the 2008 financial crisis,
Massive property bubbles prior to the financial crisis to 2009 lifted property
price by 80% that made Spanish rushing for fabulous wealth created by the
property market. Labor costs rose at all-time high, eradicated their
competitiveness within the Eurozone. Household debt exceeded disposable income.
For a long time to come, it is a prolonged deleveraging process, but if the
right policy options are chosen, it can be less painful and shorten the
recovery period.
To curb the present crisis, Spain needs a two pronged strategy.
One is economic reforms which include banking reforms on non-performing
assets derived from previous crisis. The real estate sector follows the
business cycle, ebb and flow. The glut is difficult to clear under such an
adverse environment. Even the nascent recovery in the US, the housing market is
still lagging behind the general economy. The quicker way is to loosen
foreigner property ownership.
The deleterious effects of austerity package in the Euro arena
ostensibly to rescue the economies, making condition worse, it is hard if not
impossible to attract investors due to the trough is still invisible, investor
are caught in the devil and the deep blue sea; So are the bulwarks of
restrictive labor laws, cartel industry structure and planning
restrictions. Structural reform to curtail bureaucracy and labor market
rigidness will help to attract foreign investors.
Competitiveness is by no mean for wages to race to the bottom. Wages
must compensate for sustainable living standards in accordance to economic
capability. The wages in Real Madrid do not have to level with Dongguan’s
workers in China, so long as Spain is able to achieve productivity gain; or
second, it offers distinctive products and services that customers are willing
to pay for higher wages and also company making a profit, such as Zara, its
distinctive advantage is to fast emulate the latest fashion design and
reconfigure their supply chain to facilitate speed delivery to the middle end
market. Spain needs more Zara types of competitive businesses.
The second prong of strategy is to lift the economic growth.
Under high debt environment, foreign investment is a faster way to
deleverage without using your own scarce resources, it helps to decrease
unemployment measurably and improve tax collections. That is enough to get
Spain back on track. Unfortunately, the shackles of regulations and rigid labor
market may be the Achilles heel hard to allay fears in foreign investors.
With the fortitude toward adversity and unswerving determination will
see no trouble in next to unassailable.
6.Why Germany Should Leave the Eurozone (Finance club) 17 April 2012
To me, Germany to leave the Eurozone is the worst
choice. Eurozone needs a leader for the crisis. Germany is a natural leader.
They are large in size, thrifty, efficient and have the wherewithal. The
current nature of the crisis resonates measurably Germany is a perfect match of
leader choice.
The crux of the problem is the approach towards
handling the crisis and the stark different culture between the rich North and
the poor south, apart from the imbalance in the Eurozone.
The conservative German has gone through the
hyperinflation after printing money in the 1920s, which erected a very strong
discipline culture themselves, which is also reflected in this crisis about the
ECB roles according to constitution as the independent central bank and whether
it should bailout the ailing southern countries. They are the staunch believer
that disciplined control of money supply and inflation were of paramount
importance to achieve a stable currency, providing safe haven for investment.
Their miracle of success after World War II exemplifies in their conviction
that they are cocksure the similar formula will work for the Eurozone this time
round.
The problem is much more complex than it takes, the
chink cultural divide between the conscientious German and the laissez-faire
southern peers, they can’t see eye to eye. Grate on the nerve is the strident
German’s boss around ruffle a few feather and them, the southern brother is
hemmed in living a constricted life. That makes implementing reforms an uphill
task. It is a painful reform process to demand their southern counterparts to
cut wages, reduce government spending to get the house in order. The German
needs a congruent strategy to coax the belligerent south to go along with them
rather using money as big stick. The reform package devoid of growth factor is the
most critical Achilles heel; undercutting the reform, resulting in baleful
negative spiraling effects, exacerbating the debt level and enhancing the
chances of defaults.
If Germany were to leave Eurozone, the growing chances
of Eurozone dissolving cannot be ignored. That will be calamitous, bout of
financial shock causing the financial market into mayhem. It does not benefit
Germany either. The strong deutschmark will send the export economy into a
tailspin, shaken their industry structure and Germany may have to follow the
foot path of Japan. The benefit to Germany is no longer it has to subsidize the
southern Europe. Which country will lead the Eurozone after Germany exit?
France or Italy? Will they be the better candidate to lead the Eurozone than Germany?
The most likely scenario is a dissipating Eurozone.
Judging from political climate in the Eurozone and the
financial capability of Spain, it is very unlikely they will leave Eurozone in
the near future. It is the political figure of Spain who evaluates their
choices and determines where they go.
As to Germany's attitude towards their southern
counterparts, I have mentioned in my previous comment.
7. Great article by The
Economist! Germany’s model to rescue the Euro zone is quixotic, doomed to fail
in the end due to devoid of growth. Their dependence on BRICs for growth is not
reliable and deleterious. It belies the fact that China is also depending on
Europe for growth, if that growth factor wilts, the impact will blunt its
demand, and in the end all sink together.
The kernel of truth is for low debt countries and large economies in
their endeavors to expand internal consumption and high debt countries attract
foreign direct investments to enliven the economies. (CEO,COO, CFO)14 April 2012
8. (Finance plus)(CFO) Spain's debt problems stemmed from 2008 financial
crisis, there is no short cut in deleveraging process, but if the right policy
options are chosen, it can be less painful and shorten the recovery period.
To curb the present crisis, Spain
needs a two pronged strategy. One is economic reforms which include banking
reforms on non-performing assets derived from previous crisis. The real estate
sector follows the business cycle, ebb and flow. The glut is difficult to clear
under such an adverse environment. Especially, the deleterious effects of
austerity package in the Euro arena ostensibly to rescue the economies, but
making condition worse, it is hard if not impossible to attract investors; so
the second prong of strategy is to lift the economic growth.
Greece mires into recession for four
years and still can’t see light in the tunnel, the fluff is no economic growth,
paucity of new sources of income to alleviate debt burden. Compared with
Greece, Spain is in better shape in terms of competitiveness. Probably
structural reform to curtail bureaucracy and labor market rigidness will help
to attract foreign investors.
Under high debt environment, foreign
investment is a faster way to deleverage without using your own scarce
resources, it helps to decrease unemployment measurably and improve tax
collections. That is enough to get Spain back on track. Unfortunately, the regulations
and rigid labor market may be the Achilles heel, making foreign investment not
conducive.
It may not be the best solution, but
certainly a cogent solution to alleviate Spain problems.
Nowhere did I mentioned in my
comment about bailing out, I mentioned foreign direct investments. As to
bailing out, it is about what choices you have, much less about your wish,
Greece is a case in point. Your comment also confuses me between austerity and
spending cut.
9. I am
not writing for the prize. Chaos and uncertainties will create snafus, rattle
and reverberate the market in the initial change. I don’t have panacea how to
stop that happen. The crux is: Does it solve the matter than to dodge the
problems? It boils down to the following questions:
What
is the economic reality in the Eurozone? Do debt-ridden countries adopt their
own currencies not making any economic sense? What makes the solutions more
efficient in a convulsive situation? Does the prize to pay for outweigh the
benefits?
Till
now, no one can envision what will happen and do calculation on costs and
benefits in exact sense. It is all logic and hunch to solidify the belief what
is the right way. But I am all for the idea of preplanning contingent measures,
so that implementers will not be caught in dire straits. Countries adopt their
own currencies do not need to leave Eurozone. Euro is still the world currency
and the major currency in Eurozone. The relaxation is for the sake of
expediency. It is not bereft of hope in Eurozone and life will still go on if
they hell-bent to choose the status quo option but sufferers struggle harder
and longer against intransigent currency strangulation. (Finance club)
10. In fact, the French president Nicolas Sarkozy two
speed economies in Euro zone may be a practical solution to tackle uneven
development in Northern and Southern economies. For political reason, the
wealthier Northern Economies are parochial; only reluctantly extend their
limited assistance. That is the reason prolong and exacerbate the current
crisis, because investors see no end in sight which dampen their fragile
confidence, brooking the least for bigger compensation for higher risks, that
debilitates the worsening debt crisis, making crisis control unmanageable.
To curb the present crisis, they need a two pronged strategy. One is
swift and determined decision making that is workable in current environment to
calm the market. Restructure loan in such a way that will be fully recovered
will make lenders own volition to lend easier. If the lending is in commercial
terms, private lenders would reticent and shun making loan if there is high
risk of defaulting or eventually to write off their lending, they demand higher
return and that does not help crisis stricken countries to recover, only making
the whole episode uncontrollable.
Convert partial or whole private loans to under European Financial
Stability Facility by negotiating with the banks will concentrate risk under
one portfolio rather than scattering among countries. Countries' banking
systems can start with a clean slate. The loan structure has to be a mix of
rollover plus fresh loan in the initial period; because it is the hardest time
when economic reform begins. Lengthen the time table of repayment and a hiatus
to frozen repayment plan for a fixed period of time and tie future debt lending
to fixed schedules of economic reform will give lenders more confidence in
subsequent lending. Private loans do not have this flexibility.
Second, Economic reform is an undulating path. The aim of economic
reform is to regain competitiveness. Besides fiscal discipline, finding sources
of economic growth is also of paramount importance, because it gives light to
lenders the needed assurance that everything is on course.
If the prostrate borrowing countries are allowed to use their
currencies, such as Drachma for Greece, Lira for Italy, the recovery will be
shorter; it will be baleful intransigently stick to only one currency thwarting
the borrowers’ economic self-adjustments, and increasing uncertainties.(Finance
club)
11. Since saviour is difficult to come
by, it is the watershed that the EU may want to rethink some innovative
solutions. It may not have to stick to practices in the commercial world.
Because haircut effectively means transfer of money from one country to another
for free. The lender would be loathing if they have to write off their hard
earn money for another country’s extravagance for no commercial advantage. So,
restructure the loan in such a way that will be fully recovered will make the
lenders more willingly offer assistance.
Economic
reform is an undulating path. The loan structure has to be a mix of rollover
plus fresh loan in the initial period; because it is the hardest time when
economic reform begins and during this period the risk of default is the
highest. Lengthen the time table of repayment and a hiatus to frozen repayment
plan for a fixed period of time and tie future debt lending to fixed schedules
of economic reform will give lenders more confidence in subsequent lending.
The
aim of economic reform is to regain competitiveness. Besides fiscal discipline,
finding sources of economic growth, overhaul tax system, curb corruptions and
tax evasions and curtail clunky social welfare system all come to the fore. The
progress will give lender the needed assurance that everything is on course. If
the prostrate borrowing countries are allowed to use their currencies, such as
Drachma for Greece, the recovery will be shorter; it will be baleful intransigently
stick to one currency thwarting the borrowers’ economic self-adjustments, and
increase uncertainties.(Finance club)
12. Going
forward, in no small part, government sector spending cut will most likely
worsen the economic outlook due to weaker private and public sectors (the
vagaries of changes, such as dimming world economy, weaker consumer confidence
and higher unemployment rate will take a heavy toll on major economies). They
do not mesh well with unalloyed economic growth theory.
And if the wobbled China and
Germanys’ economy continue slowing; so, where are the bright spots that play
the pivotal role to lift the world economy from floundering further? It is a
tall order. I am skeptic that those economists predicted the second half of
this year, the so-called impregnable world economy will fare better.
