PrefBlog

Fitch has opined that German banks should survive a Greek Tragedy:

German banks have “manageable” risks related to Greek sovereign debt and the Mediterranean country’s economy, according to Fitch Ratings, which said it doesn’t foresee any action on the lenders’ credit ratings.
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“A hypothetical 50 percent haircut of Greek sovereign exposure would not result in such a depletion of banks’ capitalization that a rating action would automatically be triggered, even for the more exposed banks,” Fitch said. “These either have strong owners, sufficient profitability or capital able to absorb potential losses without a structural impact on their business model, funding or franchise.”

German banks cut their holdings in Greece to $34 billion in the last quarter of 2010 from more than $40 billion, while the French have reduced claims to about $57 billion from $63 billion, according to figures from the Basel, Switzerland-based Bank for International Settlements. Commerzbank AG (CBK), Germany’s second-biggest lender, said earlier this month that it would be able to absorb any “stress” related to its sovereign-debt holdings, such as a debt restructuring.

With all this stuff about Greece. it’s easy to forget Ireland. But bad things are happening there, too:

DBRS Inc. (DBRS) has today downgraded the subordinated debt ratings, including the Dated Subordinated Debt rating of The Governor and Company of the Bank of Ireland (Bank of Ireland or the Group), to CCC from B (high). The ratings of all subordinated debt of the Bank of Ireland remain Under Review with Negative Implications, where they were placed on 3 December 2010. The rating action reflects the recent actions towards subordinated bondholders at two of Bank of Ireland’s domestic peers, and DBRS’s view that there is an increasing likelihood of similar actions towards the Group’s subordinated bondholders.

The rating action also considers the Minster for Finance’s comments that subordinated bondholders are expected to make noteworthy contributions to the incremental capital requirement under the PCAR results, which were acknowledged by the Bank of Ireland in its 1Q11 Interim Management Statement.

The bank’s Interim Management Statement doesn’t say anything beyond what’s noted by DBRS, but certainly had a strong effect on the market:

Credit-default swaps insuring the subordinated debt of Bank of Ireland Plc surged on concern the government will impose losses on bondholders as it has done with Anglo Irish Bank Corp. and Allied Irish Banks Plc.

Allied Irish this week offered to buy back junior debt at discounts of 75 percent to 90 percent prompting Standard & Poor’s to downgrade the notes to the lowest D for default grade. The “distressed exchange” is similar to that offered to Anglo Irish bondholders last year as the government seeks to share the costs of bailing out its lenders.

“The coerciveness of the Irish government has spread from Anglo to Allied,” said Alexander Plenk, an analyst at UniCredit SpA in Munich. “The offer they made was pretty much the same, and the fear in the market is that they will do the same thing with Bank of Ireland.”

The Anglo-Irish swap was coercive:

ANGLO Irish Bank Corp offered to exchange €1.6 billion of subordinated debt at a discount, paying in new bonds at a rate of 20 cent on the euro as the nationalised lender seeks to generate capital.
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Anglo Irish will offer bondholders that don’t take up the exchange 1 cent per €1,000 face amount to redeem their floating-rate notes due in 2014, 2016 and 2017, the lender said last night. The new securities will be due 2011 and guaranteed by the Government, according to the statement.

Allied Irish published their similar offer on May 13.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets basically flat and DeemedRetractibles up 11bp. Volatility – in the index-included issues! – was low and volume was average.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 5.3% (!) so the pre-tax interest equivalent spread is now about 190bp, a sharp widening from the 180bp reported May 18, as yields have moved in opposite directions.

But the big news of the day was the yellow blood all over the carpet!

Cool!

More trouble in Europe:

Standard & Poor’s said Saturday that country was in danger of having its debt rating lowered if it could not reduce its public borrowing and improve economic growth.

The ratings agency lowered its outlook for Italy’s debt to negative from stable. That means there is a one-in-three chance that S&P would downgrade Italy’s debt rating in the next two years.

Fitch and Moody’s, the other two main ratings agencies, have said they see no reason to alter their outlook for Italy’s debt. The S&P warning was enough to rattle European markets and cause investors to worry that Italy could be next on the list of countries affected by widespread European debt after Greece, Portugal and Ireland.

The Greeks might even get serious!

Greek Prime Minister George Papandreou’s Cabinet is set to endorse additional deficit cuts and asset sales, fending off speculation that the country is headed to a restructuring.

The cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro- era high after Standard & Poor’s said May 20 it may cut Italy’s credit rating. That warning came hours after Fitch Ratings cut Greece three grades.
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Greek 10-year yields jumped 19 basis points to 16.76 percent as of 9:23 a.m. in London while yields on two-year notes climbed 12 basis points to 25.58 percent. Italian 10-year yields rose six basis points to 4.84 percent.

The cost of insuring government and corporate debt rose in Europe, according to traders of credit-default swaps. Contracts on Greece soared 29 basis points to a record 1,373, Ireland jumped 14 to 655 and Portugal rose 9 to 649, while Italy increased 14 to 174 and Spain climbed 13 to 275, prices from data provider CMA showed today.

In Athens, Papandreou is chairing a Cabinet meeting today to discuss his fifth austerity package since getting a 110 billion-euro rescue from the European Union and the International Monetary Fund.

The government is looking for ways to speed up plans to sell 50 billion euros of assets, the equivalent of almost 25 percent of gross domestic product. The meeting comes as a team of IMF and EU inspectors prepare to return to Athens this week to complete their review of Greece’s progress in meeting the bailout terms.

As it happens, asset sales will speed up:

The Greek government endorsed an accelerated asset-sale plan and 6 billion euros ($8.4 billion) of budget cuts to win extra aid and stem a market slide that threatens to swamp the most debt-laden euro-area nations.

Belgium had the outlook on its AA+ investment-grade credit rating lowered to negative at Fitch Ratings yesterday as the cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro-era high.
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Greek 10-year yields jumped 46 basis points to a record 17 percent, while yields on two-year notes climbed 79 basis points to 26.25 percent. Contracts on Greek default insurance soared 29 basis points to a record 1,373.

“The bond market is the only language policy makers will listen to,” Axel Merk, chief investment officer for Merk Investments Llc said in an interview with Bloomberg Television’s Betty Liu. “Once the bond markets impose austerity on the country that’s when they follow through, when there is a backing off, when things are going better, that’s when they lapse.”

I’ll bid on the Elgin Marbles!

Whenever you deal with somebody who proudly sports a title containing the word “ethicist” or “advocate”, you know you’re going to hear a lot of arrogance and idiocy. For example, there was an article in Sunday’s Star titled DNA diviners: Valuable service or dangerous novelty?:

Knowledge of your carrier status is beneficial, says Kerry Bowman, a medical ethicist at the University of Toronto who specializes in genetic issues.
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But Bowman sees ethical problems with the disease susceptibility information, fearing it will be misunderstood or cause unnecessary fear.
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“It does raise ethical questions. . . if you’re giving people genetic information about things they cannot control,” he says.

“I mean an increased prostate cancer (risk) or something, what can you do with that except stew?”

His fear that genetic information will be misunderstood or cause unnecessary fear is simply arrogant. Get back to your book-burning, Mr. Bowman. As for what people can do with increased prostate cancer risk … well, one thing you can do is take out increased insurance that covers prostate cancer. The adverse selection implied by idiotic restrictions on the information that insurance companies can use will be the death of the industry.

Rolet of the LSE is dissing the banks’ bid for the TMX:

We look at this first and foremost as an opportunity for Canada and a growth based deal, not the reconstitution of a very strong monopolistic silo. I think the Maple team has highlighted their preferred model — the Hong Kong Stock Exchange or Deutsche Borse model — which is based on a hermetically sealed clearing silo and no competition.

There are issues today in terms of competition if you merge with your competitor, if you integrate the clearinghouse — of course that’s where the growth is going to come from because by merging with the clearinghouse you’ve prevented any future competition from entering the market. Who’s going to pay for this? Perhaps not the founding members, certainly everyone else will.
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If [Alpha and CDS] are contributed as equity does the banks’ ownership go above 50% if you have to put in another couple of billion? The whole construct, which is based on pricing power resulting from the setting up of a monopoly, comes crashing down when you look at the issue of getting approval from the shareholders of Alpha and CDS and that has to be based on a pricing agreement that realizes substantial value for them.

We don’t know anything about what the competition authorities are going to think in terms of this reconstitution of a monopolistic silo.
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I think this goes against — not just in France or Brussels or Germany or the U.K. or the U.S. — this goes against the general trend that regulators… do not want banks to own infrastructure, because infrastructure has to remain neutral.

It’s definitely not the sense we get history is moving, both in the United States and in Europe. You need at the end a separation, you need neutrality, because it’s not just about banks. Big wholesale banks are very important customers, but so are small and mid-sized broker dealers. If you get price increases linked to the integration of a clearinghouse [like CDS Inc.] who is going to pay for those increases? Who is going to pay for the fee increases resulting from lessened competition at the trading level? Is it going to be the founding members of that particular Maple consortium, or is it going to be everybody else? It’s the small corporate issuers, the small broker dealers. If a platform is not neutral, it cannot function as a exchange should.

But there are problems with the LSE bid:

The value of the bourse’s offer to buy TMX Group Inc. (X) with equity fell 4.9 percent below the price of the Toronto stock exchange operator’s shares yesterday, according to data compiled by Bloomberg. The gap is the widest of any all-stock deal over $1 billion, indicating to arbitragers that LSE’s equity alone won’t be enough to fend off a higher bid from a group of Canadian banks and funds trying to keep TMX in local hands.

Fox News has enough about the DSK thing to make you sick.

DBRS has downgraded Portugal to BBB+ [Trend Negative] and published a commentary titled The Effect of Sovereign Risk on Securitisations in the Euro Area.

Chinese equities got hit today:

Jim Chanos, the hedge-fund manager known for predicting Enron Corp.’s 2001 collapse, says he’d short sell Chinese companies listed in the U.S. if it were feasible to borrow shares to open the bearish positions.

The Bloomberg Chinese Reverse Mergers Index has plunged 41 percent since Nov. 8 amid speculation financial statements from companies such as China MediaExpress Holdings Inc. (CCME) can’t be trusted. The concern intensified this week after Longtop Financial Technologies Ltd. (LFT), whose initial public offering was underwritten by Goldman Sachs Group Inc. and Deutsche Bank AG, said its auditor quit because of false records.

S&P upgraded Saskatchewan:

The province joined an elite club of provinces on Tuesday when Standard & Poor’s upgraded its debt rating to triple-A. The only provinces to share the triple-A honour are western neighbours Alberta and British Columbia.
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Rather than quickly spending its newly-earned wealth, the provincial government has put its tax revenue toward paying the bills. S&P gave special credit to Saskatchewan for its “low-and-declining debt burden.” As of March 31, the province’s fiscal year-end, Saskatchewan’s debt totalled $4.6-billion, representing 38 per cent of this year’s projected operating revenues and only 8 per cent of its gross domestic product. Canada’s federal debt-to-GDP ratio sits at around 35 per cent.

Knowing how to actually do something useful can be lucrative:

College students’ choice of major can mean the difference between median earnings of $120,000 for petroleum engineering and $29,000 for counseling psychology, a study by Georgetown University showed.

Of the top 10 undergraduate majors with the highest median salaries, eight were in engineering, including aerospace, chemical and mechanical, according to the study released today by Georgetown’s Center on Education and the Workforce.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets losing 10bp and DeemedRetractibles up 9bp. Not much volatility, but volume was above average. TMX block trading data from the Financial Post is not available at time of writing.

Another bad day for Greek bonds:

The yield on the Greek 10-year bond added 56 basis points, driving the difference with German bunds to a record 1,349 basis points.
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Stocks and the euro extended losses as the Associated Press reported Norway froze a 235 million kroner ($42.3 million) grant to Greece because it hasn’t lived up to conditions linked to the grant, while Fitch Ratings said any potential extension of Greek bond maturities would be considered a default as it downgraded the debt.
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The yield on Greek 10-year bonds surged 1.11 percentage points to 16.55 percent this week. The Portuguese 10-year yield increased 27 basis points to 9.38 percent, sending the spread with benchmark German bunds 33 basis points wider. Irish 10-year bond yields rose six basis points, with similar-maturity Spanish yields nine basis points higher.

The IMF has lent some money to Portugal:

The International Monetary Fund approved a 26 billion-euro ($36.8 billion) loan to Portugal as part of a joint bailout with the European Union in the latest effort to stem the region’s sovereign debt crisis.

The Washington-based institution will make 6.1 billion euros available immediately, the fund said in an e-mailed statement today. The IMF followed European officials, who on May 16 endorsed the 78-billion ($110 billion) joint package.

Sadly, the article does not address the question of whether the cheque was delivered by women in skimply little maid outfits.

The FRB-Boston has released a public policy brief by Jeffrey C. Fuhrer and Giovanni P. Olivei titled The Estimated Macroeconomic Effects of the Federal Reserve’s Large-Scale Treasury Purchase Program:

This brief examines an issue of current importance to the conduct of U.S. economic policy: how has the Federal Open Market Committee (FOMC) plan to purchase up to $600 billion of Treasury securities by June 30, 2011 affected the movement of inflation, GDP, and employment to more desirable medium-term and long-term levels? Following the FOMC’s announcement of the plan on November 3, 2010, other events that potentially influence Treasury yields have been at play. To estimate the effects that the FOMC Treasury purchases may have on the goal of achieving more desirable levels of inflation and employment, the authors make use of different models to gauge the likely effect upon interest rates, the interest rate effects on real spending (GDP), and how changes in GDP may be affecting the employment rate.

The FRB-Cleveland has published the May, 2011, edition of Economic Trends.

OSFI has released the Spring, 2011, edition of the OSFI Pillar with articles (well, notes, really):

• OSFI Plan and Priorities for 2011-2014
• Draft revised MCT guideline for P&C insurers
• Speech by Assistant Superintendent Ted Price
• Speech by Superintendent Julie Dickson
• External peer review panel on 25th CPP Actuarial Report
• Draft Stress Testing Guideline for Defined Benefit Pension Plans

There was good inflation news:

The consumer price index increased 0.3 percent in April after a 1.1 percent gain in the previous month, Statistics Canada reported today. The median forecast of 27 economists in a Bloomberg News survey was for a 0.5 percent advance.
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Consumer prices rose 3.3 percent from a year earlier, matching the annual rate of advance in March.

The TMX will resist bank hegemony. Go, guys, go!

Bubble, bubble, toil and trouble:

Housing costs for the average two-storey home in Vancouver today eat up the equivalent of 80 per cent of a typical family’s annual pretax income, according to new research, putting ownership out of reach for most.
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Across the country, homeowners are putting a larger portion of their earnings toward their homes, and interest-rate increases are likely to put further pressure on homeowners in the coming months, the Royal Bank of Canada said in its quarterly affordability index.

The problem is especially pronounced in Vancouver, where the bank estimated families must now dedicate 72 per cent of their household income to pay the mortgage, property taxes and utilities on a bungalow. In Toronto, it would take 47.5 per cent.

It was another fine day for the Canadian preferred share market, with PerpetualDiscounts inching ahead by 1bp, FixedResets up 11bp and DeemedRetractibes rocketting 28bp. The last group were led by SLF issues, which went ex-Dividend today. Volume was mediocre.

See you after the Rapture!

The lifecos continue to whine about new capital requirements:

International Financial Reporting Standards (IFRS) set to take effect 2014 “will severely inhibit” the core business of Canadian lifecos, Donald Stewart, chief executive of Sun Life Financial Inc., told the company’s meeting Wednesday.

One of the main problems with IFRS is that it changes the way companies value products such as life insurance policies, potentially forcing companies to hike prices beyond the reach of many Canadians. Mr. Stewart warned this wouldn’t benefit either the industry or the country.

Meanwhile, insurers are also bracing for the impact of new capital rules that are “significantly more onerous” than existing regulations, he said.

The industry is working with the Office of the Superintendent of Financial institutions, the regulator, to try to ensure that the new capital rules are not excessively stringent.
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The comments echo recent statements made by Don Guloien, chief executive of Manulife Financial Corp. Mr. Guloien told his company’s annual meeting May 5 that new accounting and capital rules constitute one of the single biggest risks that Manulife currently faces.

The industry is particularly concerned that the new IFRS accounting rules will make earnings more volatile. That could have a negative impact on capital and on key capital ratios used by the regulator to determine a company’s financial health.

DSK has quit the IMF to pursue other interests.

Here’s a straw in the wind:

Amazon.com Inc. (AMZN) now sells 105 books for its Kindle electronic-readers for every 100 printed books.

Sales of the e-books for the Kindle, introduced in 2007, surpassed hardcover titles in July 2010, and overtook paperbacks six months later, the Seattle-based company said today in a statement.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts gaining 20bp, FixedResets up 5bp and DeemedRetractibles leaping ahead 38bp. The Performance Highlights table told a tale, with nine entries, all DeemedRetractible and mostly insurers – which was also the tilt on the volume table, although not to as large an extent. Volume was comfortably above average.

There’s a scuffle about a Greek default:

European Central Bank officials ruled out a Greek debt restructuring, clashing with political leaders over a solution to the sovereign financial crisis.

“A Greek debt restructuring is not the appropriate way forward — it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi, Greece. Fellow board member Lorenzo Bini Smaghi said in Milan that “a solution for reducing debt but not paying for it will not work.”

Now, I will not claim that I’m the world’s greatest scholar on the debt crisis, but that seems to me to be the first official admission that the purpose of the various bail-outs is to save the banks. Anybody have anything both earlier and more explicit?

More gloomy punditry on US housing:

More than half U.S. homeowners and renters say housing won’t recover until at least 2014, reflecting a deepening pessimism about the real estate market, according to a survey by Trulia Inc. and RealtyTrac Inc.

The survey, taken in April, found that 54 percent of respondents don’t expect a recovery for at least three years, up from 34 percent in November, the two real estate data companies said today. Those who see a turnaround by the end of next year fell to 15 percent from 27 percent.

The housing market is weakening as near record-low interest rates and falling prices fail to boost demand after the expiration of a federal tax credit for homebuyers last year. Values will come under more pressure as 1.8 million properties that are delinquent or in foreclosure are added to the inventory of unsold homes, according to a March estimate by CoreLogic Inc., a real estate information firm in Santa Ana, California.

The iPad has been extraordinarily disruptive:

The iPad is wreaking havoc on the personal-computer market.

Hewlett-Packard Co. (HPQ)’s consumer PC sales plunged 23 percent last quarter, and the company lopped $1 billion off its annual sales forecast. And while rival Dell Inc. (DELL) beat analysts’ estimates because of corporate demand, its sales to consumers slumped 7.5 percent. More than 70 million tablets like the Apple Inc. (AAPL) iPad will be sold in 2011, a total that will balloon to 246 million in three years, Jefferies & Co. said yesterday.

You don’t need a full-blown computer to use eMail or look at dirty pictures on the internet!

There’s sales parties, sure. And then there’s REALLY GOOD sales parties!

A Munich Re unit hosted about 20 prostitutes at a Budapest party to reward the insurer’s high- performing agents, a spokesman said.
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Ergo hosted the party for about 100 guests at the historic Gellert spa, Handelsblatt reported in a preview of an article to be published today. Women wore color-coded armbands, the newspaper said, citing unidentified guests, with red for hostesses, yellow for those available for sexual favors and white for women reserved for executives and top agents. After each trip to beds set up near the thermal baths, a woman would receive a stamp on her forearm, the paper reported.

And, just to get even further off topic, The Periodic Table of Videos is a great website!

It was a sharply mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets losing 17bp, and DeemedRetractibles ahead 11bp. The Performance Highlights table is more interesting than usual, but still nothing like the glory days of late 4Q08 / 1Q09, which will be treasured in my memory for as long as I still have one.

PerpetualDiscounts now yield 5.51%, equivalent to 7.16% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 5.4% (maybe I should say, a little over 5.35%), so the pre-tax interest-equivalent spread is now about 180bp, about the same as reported on May 11.