Category Archives: Banking

China says January lending down 28% from year ago

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Looks like China is still in ‘inflation fighting’ mode as state lending over there is functionally like federal deficit spending here.

As previously discussed, while China may successfully engineer a soft landing in their fight against inflation, I’ve never seen anything but hard landings elsewhere when fighting inflation. And with China a ‘first half/second half’ story, a weak first half generally means an even weaker second half.

China says January lending down 28% from year ago

February 12 (AFP) — Chinese bank lending fell 28 percent in January from a year earlier, official data showed, suggesting Beijing is reluctant to open the credit valves too quickly for fear of reigniting inflation.

State-owned lenders issued 738.1 billion yuan ($117.26 billion) in new loans in January, down 288.2 billion yuan from the same month last year and well short of analyst forecasts for one trillion yuan, the central bank said Friday.

Banks handed out 640.5 billion yuan in loans in December.

Chinese banks typically ramp up lending at the beginning of the year to avoid losing quotas issued by regulators and the effects of changes in monetary policy. Analysts said the weaker-than-expected data partly reflected the earlier than usual Chinese Lunar New Year holiday, which fell in January, and the government’s still tight restrictions on credit.

Mark Williams, an economist at Capital Economics in London, said it was the lowest December to January increase since 2007.

“It is hard to escape the feeling that the weakness of lending was at least partly a reflection of the slow pace at which policy is being eased,” he said.

Late last year the central bank eased lending restrictions on banks and analysts expect similar moves this year as authorities try to spur economic activity and prevent a collapse in the property market.

But most experts had forecast another easing of bank reserve requirements before the week-long Lunar New Holiday and the government’s failure to act suggests it does not expect a sharp slowdown in economic growth.

There is growing evidence that the world’s second largest economy is slowing as turmoil in eurozone countries and weakness in the United States hurts demand for Chinese exports, a key driver of the Asian giant.

The International Monetary Fund this week warned that an escalation of Europe’s fiscal woes could slash China’s economic growth by half this year, and it urged Beijing to prepare stimulus measures in response.

But Chinese leaders, worried about reigniting politically sensitive inflation, have signalled their intention to move cautiously and fine-tune policy as needed.

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euro zone update- markets yet to discount the discounts

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The issues I’ve been discussing over the last year or two while now crystallizing, remain highly problematic.

The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question: ‘If Greece doesn’t have to pay, why do I?’- threatening a far more disruptive outcome that is yet to be fully discounted.

That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.

And note, also as previously discussed, that there has yet to be an actual Greek default, and that all Greek bonds have continued to mature at par, as there has yet to be an acceptable alternative.

So what are the alternatives?

1. Continue to fund Greece with terms and conditions.
2. Don’t fund Greece which forces:
  a. Greece is forced to limit spending to actual tax revenues
  b. Greece moves back to the drachma

And what are the ‘terms and conditions’?

Austerity is always the lead demand, which slows both the Greek economy and to some extent the euro zone in general.

Additional demands currently include discounting Greek bonds to bring down their debt to GDP ratio to ‘sustainable’ levels. However, after 8 months of negotiations, this has proven highly problematic, probably for reasons yet to be fully disclosed. And, as just discussed, there may be a growing awareness that discounting opens Pandora’s box with the politically attractive question ‘if Greece doesn’t have to pay, why do we?’

So what actually happens?

My best guess, and not with a lot of conviction, is that nothing is concluded before the coming maturity dates, and the ECB winds up writing the check to support short term Greek funding to buy more time for more inconclusive discussion. So, again as previously discussed, seems like this is the solution- death by 1,000 cuts and reluctant ECB bond buying when push comes to shove to keep it all going.

And, currently, the catastrophic risk I’d highly recommend immediately hedging is the risk that Greek bonds are formally discounted, rapidly followed by a global discussion of ‘so why should we have to pay?’ Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.

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Portugal Union Leader Wants Debt Renegotiation

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Yes, as previously discussed, the obvious political move is to demand the same discounts as Greece.

Especially with the pending Greek ‘restructure’ and ECB check writing to support the banking system seemingly making the euro stronger and not causing inflation.

And the ‘sustainability maths’ is just about the same for all of them as well, particularly given the current slowdown.

Once the markets realize the politics are moving in that direction, all euro member nation bonds again become suspect and the crisis enters the next stage, resulting in the ECB pretty much funding everything, one way or another.

It’s just a question of how it all gets from here to there.

Portugal Union Leader Wants Debt Renegotiation

By Axel Bugge and Daniel Alvarenga

Feb 7 (Reuters) — Portugal must renegotiate its debts rather than impose harsh austerity measures to overcome its economic crisis, the head of the country’s largest trade union said on Wednesday, threatening to step up strikes if the government pushed on with cuts.

Armenio Carlos, head of the CGTP union, told Reuters Portuguese workers would take a stand against attacks on labor rights, which he said were part of the government’s sweeping economic reforms promised under a 78 billion euro ($103.29 billion) bailout.

“What we defend is the renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount,” Carlos said in an interview, adding that the country’s bailout had made it impossible to meet its obligations.

Portugal’s debt currently equals about 105 percent of gross domestic product.

“We are being confronted with a neo-liberal attack on workers’ rights,” he added, saying the government’s recent labor reform, making it easier to hire and fire, could spark a growing wave of protests.

The union leader, a former electrician and an ex-Communist lawmaker who took over as head of the CGTP a week ago, warned that with the austerity policies demanded by the bailout, Portugal was heading down the same road to ruin as Greece.

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Bristol Pound currency can be used for tax payment

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This will work- can be used to pay local taxes:

‘Bristol Pound’ currency to boost independent traders

By Dave Harvey

Feb 5 (BBC) — The Euro is in trouble, the world’s financial system is in turmoil. Is this the perfect time for cities to go it alone, and print their own money?

A group of independent traders in Bristol are launching their own currency, with the backing of the council and a credit union.

The “Bristol Pound” will be printed in notes, and also traded electronically.

There are other local currencies in the UK, but this is the first which can be used to pay local business taxes.

Ciaran Mundy, the director of the Bristol Pound, explained the concept behind the currency.

“Big companies just hoover up money from a local area,” he told me.

“Money goes into their financial system and typically out into London and into the offshore sector.”

Corporate challenge
But by definition, Bristol pounds must stay in the city. Spend a tenner in a Bristol bakery, and they must use it to pay their suppliers or staff. In turn, those companies will have to use the money within the local economy.

“We’ll be driving more business to independent traders, and ensuring the diversity of our city, which is one of the things people love about Bristol,” Mr Mundy said.

Already more than 100 firms are signed up. A family bakery, the Tobacco Factory Theatre, the Ferry company, dozens of small cafes – even Thatcher’s Cider will accept Bristol pounds.

So how will it work?

They will print notes in £1, £5, £10 and £20 denominations. A Bristol pound will be worth exactly £1 sterling.

People will open an account with the Bristol Credit Union, which is administering the scheme, and for every pound sterling they deposit, they will be credited one Bristol pound.

This money can then either be cashed, or used electronically to pay bills online or even with a mobile phone.

Since the money is held by the credit union, which has FSA backing, it will have the same protection as any other deposit account. The standard government scheme guarantees up to £85,000 per person.

Bristolians are being challenged to help design the new notes. The organisers have already created a logo, and produced security features to counter forgery.

There is a silver hologram design, a gold foil strip with serial numbers embedded, and other features which are impossible to reproduce.

But whose face should be on the notes? That is down to Bristolians.

Small change?
“Bristol’s own currency should reflect the values and the lives of people who live here,” explained the designer, Adele Graham.

“We’re open to any suggestions. It could be famous people, but it can be any design at all which Bristolians feel represents their city.”

Local people can submit their ideas on the Bristol Pound’s website. The competition will run until the end of February, and the notes will be launched in May.

But will the Bristol Pound really take off?

Most local currencies have remained small. The Totnes Pound was the first to launch, in Devon in 2006, and has 70 traders involved.

Eighteen months ago Stroud, in Gloucestershire, starting printing its own currency, but to date no more than 30 firms are taking the money.

Bristol’s organisers point to two key differences: online banking, and council support.

Since the scheme is run by a bona fide financial institution, the Bristol Credit Union, traders can pay each other large amounts of money at the click of a button.

Also unique is the ability to pay local business rates in local currency. The council leader, Councillor Barbara Janke, is fully behind the scheme.

She told me: “This is a chance to demonstrate the economic resilience of the city.

“We want to make it as easy as possible for people to use the Bristol Pound.”

‘No real boost’
Paying business rates in Bristol pounds means firms need not worry about being stuck with thousands of pounds they can’t spend, if their own suppliers refuse them.

Naturally, there are sceptics. Will people find it inconvenient to carry two kinds of notes in their pockets? Will it be more than a gimmick?

Interestingly, it is the prospect of success that worries some the most.

Ben Yearsley understands money. Big money. He is an investment strategist at Hargreaves Lansdown, the Bristol finance house which looks after £22bn of people’s savings.

He points out that the scheme will do nothing to help Britain’s economic recovery.

“This won’t boost spending,” he explained. “It will merely move money from one sector to another, from national firms to local ones.”

And if the Bristol Pound really works, Mr Yearsley worries that big national firms may be put off.

“A lot of people work for the national companies, and you may actually cause an increase in unemployment. Worse, there may be a brake on investment in the city.”

But the organisers think he worries too much.

Stephen Clarke, a local lawyer who is working for the new currency for nothing, said: “This is not an attack on national chains.

“We just want to preserve our local independents, and you can see how hard it is for them at the moment.”

Whenever local shops close down, and supermarkets or chain stores open, there are complaints about “cloned high streets” and “chain store Britain”.

Well, now if people really want to support independents, they can quite literally put their money where their mouth is.

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Canada Employment

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But their banking system is sound.

Like talking about how good the person looked at his funeral?


Karim writes:

Another downbeat number with the unemployment rate rising to an 8mth high of 7.6% (from 7.5%).

Total employment up 2.3k, with full-time jobs -3.6k after -21.7k the prior month.

In the past 5mths the unemployment rate in Canada has risen by 0.4% while the U.S. has fallen 0.6% (subject to today’s #)-a large move in a short time.

Chart below shows the recent divergence in Conference Board confidence surveys for Canada (blue) and U.S. (red).

Confidence divergence

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Another Gross error.

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Another Gross error.
Bank’s aren’t allowed to take what’s called ‘interest rate risk’ by borrowing short and lending long.
It’s the first thing the regulators and supervisors look for.
It’s the S in CAMELS ratings- Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to interest rates.

Fed’s Low Rates Killing Credit, Slowing Recovery: Gross

By Jeff Cox

Feb 1 (CNBC) — The Federal Reserve’s zero-interest-rate policy is hampering economic recovery by discouraging bank lending, Pimco bond titan Bill Gross said in an analysis.

For banks, a healthy lending environment exists where they can borrow at low rates in the short term and lend at significantly higher rates over the long term, a situation that creates a profit through a positively sloped yield curve

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Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

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Evidence of real progress will be a statement like:
‘Draghi sees no evidence of any possible channel from ECB loans to the economy’

Bank liquidity is something like wheels on a car.
Without wheels the car won’t function, but neither are wheels alone enough to make it go.

Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.

In the US the unlimited liquidity provision comes mainly via FDIC insured deposits, supplemented by funding from the Fed. The Fed is the liquidity provider of last resort for its member banks, while at the same time it uses the banking system’s cost of funds as its instrument of monetary policy.

The euro zone hasn’t figured this out yet.
The liquidity provider of last resort is the ECB, as it’s the ‘issuer of the currency’, and as such not itself liquidity constrained. The member nations are like the US states, and are necessarily liquidity constrained, and therefore not ’empowered’ to be liquidity providers of last resort to their member banks.

So in that sense, as the bank funding by the ECB grows, it’s all gravitating towards what all other nations have in place. The problem is the euro zone leaders don’t understand that aspect of banking, as evidenced by the way they are resisting the shift to ECB funding, and, in fact, working towards moving banks away from ECB funding.

Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

By Jana Randow and Simone Meier

Jan 28 (Bloomberg) — “Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” ECB President Mario Draghi told Davos. “There is a lag. We will have to see.” “We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.” “If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros, which is exactly the amount of bank bonds that were to come due in this period of time,” he said.

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GDP/Euro Lending Data

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Good report!
Additional notations below:

Karim writes:
U.S. GDP growth in Q4 a bit weaker than expected at 2.8%

Perhaps the FOMC had word of this, explaining the unexpected dovishness?

1.9% of that growth accounted for by inventories. Other contributions: (consumer spending 2%, fixed investment 0.4%, government spending -0.9%, net exports -0.1%).

Rebuilding post earthquake supply lines probably now complete.
Govt spending continues weak, as revenues increase some and the federal deficit falls some.
Imports rise quickly with any increase in consumer spending.

In growth terms: (consumer spending 2%, fixed investment 3.3%, government spending -4.6%, exports 4.7% and imports 4.4%).

So stripping away inventories, growth was below trend. Plus savings rate fell back to 3.7% from 3.9%.

Domestic savings down with spending up indicates increasing consumer debt.
The question is whether this is ‘wanted’ as per increased desires to buy on credit,
or because the decline in govt deficit spending ‘forced’ more consumer debt for ‘essentials’

And, core PCE slowed from 2.1% to 1.1%.

Also explains FOMC dovishness as they see risk as asymmetrical, fearing deflation more than inflation.

In sum, will keep QE3 talk very much alive

And somewhat moot, even as Q1 GDP forecasts are being revised down some, as most don’t think QE matters much for the real economy.

What’s becoming understood is that while there is ‘more the Fed can do’
for all practical purposes there is nothing they can do to further support the real economy.

Euro money and lending data shockingly weak in December.

Might partially explain how some banks apparently got the balance sheet room to buy more national govt debt?

In particular, record single month decline in lending to the non-bank private sector (74bn). Of that, 37bn decline in lending to non-financial corporates and 8bn drop in lending to households.

This should be very supportive of additional ECB rate cuts over the next few months.

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China PBOC Asks Banks to Refrain From Lending Too Much

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China PBOC Asks Banks to Refrain From Lending Too Much

Jan. 13 (Bloomberg) — The People’s Bank of China’s regional branches asked banks to refrain from lending “too much” in early part of the year, Reuters reports today, citing unidentified people in the banking industry.

Shanghai PBOC branch told banks that 1Q new loans shouldn’t exceed 40% of total new loans last year, according to Reuters

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Italy Bond Auction Fails to Match Spain Success

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The banking system can’t fund all the euro member nations under current regulatory restrictions, including capital requirements and diversification rules.

The 3 year variable rate funding from the ECB may have helped some banks with room on their balance sheets, but with general liquidity concerns, buy more national govt debt, but that would be a one time adjustment. Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.

Italy Bond Auction Fails to Match Spain Success

By Valentina Za

Jan 25 (Reuters) — Italy’s three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Italy raised the maximum planned amount of 4.75 billion euros at the auction but did not live up to market expectations raised by a Spanish tender on Thursday where Madrid raised 10 billion euros, twice the planned amount, at lower rates.

Both Italy and Spain are benefiting from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system in an unprecedented move last month. Investors, however, remain more cautious towards Rome in the light of its much larger refinancing needs.

“The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply,” said Michael Leister, a strategist at DZ Bank in Frankfurt.

Italian bonds rallied after domestic banks awash with ECB money snapped up Spain’s bonds on Thursday. The mixed results of the Italian sale tempered market enthusiasm and Italy’s 10-year yields rose back above 6.60 percent in the secondary market, after falling below 6.50 earlier in the session, to their lowest level in more than a month.

“This will serve to dampen some of the markets’ enthusiasm in the wake of yesterday’s Spanish auction … It doesn’t defeat the notion that the ECB extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support,” said Richard McGuire, a strategist at Rabobank in London.

LOWEST SINCE SEPTEMBER

Italy sold its November 2014 three-year benchmark bond at an average rate of 4.83 percent on Friday, down sharply from a yield of 5.62 yield at an auction just two weeks ago.

In a sign of improving funding conditions, this was the lowest yield at a three-year auction since September last year though fellow debt struggler Spain only had to pay 3.384 percent on three-year bonds on Thursday.

The bid-to-cover ratio fell to around 1.22, versus an already weak 1.36 ratio at the end-December sale, showing anemic demand for the paper. This time, however, Italy sold the top planned amount of its three-year benchmark.

Rome also sold debt due in July 2014 and August 2018.

The ECB’s liquidity boost, evident also at an Italian bill sale on Thursday where one-year yields more than halved, leaves Italy’s Treasury better placed to refinance some 90 billion euros of bonds maturing between February and April.

That is more than Spain aims to issue in medium and long-term maturities in the whole of 2012.

What analysts now describe as a challenging task may have been an impossible one at the end of November, when market fears of a financial collapse pushed Italy’s short-term debt costs towards 8 percent.

Under the leadership of a new technocrat government, Italy has embarked on a bold austerity push aimed at balancing the budget in 2013.

Analysts at Barclays Capital noted in a report that third-quarter budget data showed a decline in current expenditures for the first time ever, when excluding debt servicing costs.

But Prime Minister Mario Monti must now convince markets it can revive Italy’s ailing growth rate by overcoming entrenched resistance to its liberalization program.

Analysts warn that sentiment on the markets remains fragile with worries over a deal with private investors to voluntarily write down half of the value of their Greek debt lingering in the background.

“Looking beyond this one auction, the issuance challenge for Italy remains significant. Market pressures are most apparent in the 10-year sector of the curve which will face supply in two weeks time,” Citi analysts wrote in a research note.

Italy will sell five- and ten-year bonds at the end of January. On this longer maturities demand from foreign investors plays a bigger role but analysts say Italy would be able to shift only part of its funding burden to the short-term ahead of a second three-year liquidity tender at the end of February.

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