News Highlights - Week of 12 - 16 September 2011
Hong Kong, China's industrial production growth rate fell to 2.0% year-on-year (y-o-y) in 2Q11 from 3.5% in 1Q11, due mainly to a decline in the output of textiles and apparels. Textile production fell 13.5% y-o-y while apparel fell 9.6%. In Japan, the Ministry of Economy, Trade, and Industry revised its July production index downward to -3.0% y-o-y from a preliminary figure of -2.8%.
*In the Philippines, merchandise exports shrank for a third consecutive month in July- by 1.7% y-o-y to USD4.4 billion-as the global slowdown curbed demand for electronic products. Meanwhile on a month-on-month basis, exports grew 7.3%. Singapore's non-oil domestic exports grew 5.1% y-o-y in August after posting a 2.8% decline in July.
*In the Republic of Korea, the combined net income of 62 securities companies jumped 74.7% y-o-y to KRW793.2 billion in the first quarter of fiscal year 2011 (April-June). Their return on equity for the quarter increased to 2.1% from 1.3% in the same period last year. According to the Financial Supervisory Service (FSS), the increase was brought about by a 12.4% y-o-y increase in commissions revenue, which reached KRW2.2 trillion for the quarter, as well as a 58.3% y-o-y rise in the income from proprietary trading, which amounted to KRW1.1 trillion.
*Growth in overseas foreign worker remittances to the Philippines eased to 6.1% y-o-y in July-for a total of USD1.7 billion for the month-from 7.0% growth in June. Meanwhile, in the first 7 months of the year remittances rose 6.3% y-o-y for a total of USD11.4 billion. Remittances from land-based and sea-based workers grew 4.3% and 14.1% y-o-y, respectively.
*Powerlong Real Estate, a Chinese real estate company based in Hong Kong, China, issued HKD1.0 billion worth of senior notes to China Life Trustee Limited. The notes mature in 3 years and carry a coupon of 13.8%. In the Republic of Korea last week, Korea Eximbank sold a KRW150 billion 1-year zero coupon bond and a KRW50 billion 6-month zero coupon bond. Korea Development Bank issued a 3-year bond worth KRW150 billion at a coupon rate of 3.76%. Also, Korea Finance Corporation priced samurai bonds totalling JPY30 billion including a JPY15.5 billion 2-year bond, a JPY7.5 billion 3-year bond, and a JPY7.0 billion 5-year bond.
*In Malaysia, property developer Perdana Parkcity issued MYR400 million worth of medium term notes (MTN), while Telkom Malaysia sold MYR300 million worth of 10-year Islamic MTN. Singapore's Housing and Development Board issued last week SGD625 million worth of 5-year bonds and SGD650 million 10-year bonds Meanwhile, Thailand auctioned a 50-year THB5.0 billion bond with a 4.85% coupon.
*China National Petroleum Corp. (CNPC) and China Railway 16th Bureau Group announced that they plan to issue commercial paper with a maturity of 1-year on the interbank market. China National Petroleum Corp. will issue CNY15.0 billion and China Railway 16th Bureau Group will issue CNY560 million.
*Government bond yields rose for all tenors in Indonesia and Malaysia and rose for most tenors for Korea; Philippines; Singapore and Thailand as risk aversion rises over concerns that Greece may default. Yields fell for most tenors in the PRC; Hong Kong, China and Vietnam. Yields changes were mostly mixed for Japan. Yield spreads between 2- and 10-year tenors narrowed for the PRC and Hong Kong, China but widened for the rest of the Emerging East Asian markets.
Amnesty Scheme in Works to Get Back Money in Foreign Accounts
Unlike in previous attempts, govt in position to roll out scheme this time due to robust tax info
OUR BUREAU NEW DELHI
India could announce an amnesty scheme to give its citizens an opportunity to come clean on their undeclared assets and bank accounts held overseas, joining the likes of the US, UK, Italy, and Germany that have announced similar schemes.
The finance ministry is considering a scheme — offshore voluntary compliance scheme — that could allow for voluntary declaration of undisclosed assets held overseas, helping put such funds to productive use in the country and also raise revenues. "The scheme is under consideration. The income-tax department's flow of information has become robust. So, it time to consider such a scheme," said a finance ministry official. A panel on black money headed by the Central Board Direct Taxes chairman is expected to take up the proposal at its next meeting later this month.
However, selling such a scheme politically will be difficult, as it is sure to invite charges of condoning black money at a time when corruption issue has created widespread angst. In its reply to Parliament earlier this year, the finance ministry had categorically ruled out such an amnesty scheme but has begun to deliberate it after India Inc made a pitch for channelising undisclosed funds lying overseas for infrastructure development in its interaction with finance minister Pranab Mukherjee on August 1.
The ministry is looking at various options, such as reduction in penalty and relief from prosecution and mandatory disclosure of source of income. "Final call on the scheme and its structure would be taken only after considering all pros and cons," said the official.
Tax experts say such a scheme can only work if confidentiality of data and identity is kept and income-tax investigation becomes more rigorous. "Deterrent has to be strong enough for such a scheme to make sense," said Sudhir Kapadia, tax markets leader, Ernst & Young.
An expert group in the Central Board of Direct Taxes had recommended a similar scheme earlier, but it could not be launched as flow of information on overseas accounts and assets was not robust.
India has signed information exchange agreements with tax havens and set up overseas tax units in certain sensitive tax jurisdictions, such as Mauritius, which has helped increase the flow of information.
The income-tax department has also strengthened its internal information systems and has created a directorate of criminal investigation to deal with tax-related crime.
Investigation directorates have collected data from agents and officials of foreign banks offering services and soliciting opening of foreign banks accounts.
The income-tax department is also receiving data from the financial intelligence unit in India that has begun to receive data from other FIUs. The department had recently issued showcause notices to some of the foreign account holders based on information it received through different channels.
Officials feel the possibility that bank accounts and funds held overseas could come to the notice of tax authorities may encourage people to avail of the scheme.
The buzz of the government launching an amnesty scheme had got louder ahead of Budget 2011-12 but no scheme was unveiled. Mukherjee later clarified: "Amnesty schemes have a double side. Sometimes these are criticised. People say these are at the cost of honest tax payers and sometimes it helps bring in money." Previous such schemes had also attracted criticism. The Supreme Court also called the menace a "plunder of the nation".
(The following column by George Soros first appeared in the New York Review of Books and on Reuters.com. The opinions expressed are his own)
By George Soros
REUTERS – The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.
Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.
There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset – collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now – lost some or all of their value.
Unfortunately the euro crisis is more intractable. In 2008 the US financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.
In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.
It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had they been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.
Where are we now in this process? The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)-agreed on by twenty-seven member states of the EU in May 2010-and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.
The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found that the EFSF is constitutional, it prohibited any future guarantees benefiting additional states without the prior approval of the budget committee of the Bundestag. This will greatly constrain the discretionary powers of the German government in confronting future crises.
The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe. As it is, the contagion-in the form of increasing inability to pay sovereign and other debt-has spread to Spain and Italy, but those countries are not allowed to borrow at the lower, concessional rates extended to Greece. This has set them on a course that will eventually land them in the same predicament as Greece. In the case of Greece, the debt burden has clearly become unsustainable. Bondholders have been offered a "voluntary" restructuring by which they would accept lower interest rates and delayed or decreased repayments; but no other arrangements have been made for a possible default or for defection from the eurozone.
These two deficiencies – no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece – have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds. As a stopgap measure the European Central Bank (ECB) stepped into the breach by buying Spanish and Italian bonds in the market. But that is not a viable solution. The ECB had done the same thing for Greece, but that did not stop the Greek debt from becoming unsustainable. If Italy, with its debt at 108 percent of GDP and growth of less than 1 percent, had to pay risk premiums of 3 percent or more to borrow money, its debt would also become unsustainable.
The ECB's earlier decision to buy Greek bonds had been highly controversial; Axel Weber, the ECB's German board member, resigned from the board in protest. The intervention did blur the line between monetary and fiscal policy, but a central bank is supposed to do whatever is necessary to preserve the financial system. That is particularly true in the absence of a fiscal authority. Subsequently, the controversy led the ECB to adamantly oppose a restructuring of Greek debt-by which, among other measures, the time for repayment would be extended-turning the ECB from a savior of the system into an obstructionist force. The ECB has prevailed: the EFSF took over the risk of possible insolvency of the Greek bonds from the ECB.
WORTH READING :
The most scathing report describing in exquisite detail the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies and specifically its chief market strategist David Zervos. "The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers….Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. " Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You'll need it.
Full Report:
In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US sub prime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation – however, the days of excess spread collection and big commercial bank bonuses are now long gone. We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference – that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.
In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households – there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 – forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system – TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets. Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let's contrast this with the European debt crisis evolution.
In Europe, the subprime borrowers were sovereign nations. As the markets came to grips with this reality, countries were continuously shut out from the private sector capital markets. The regulators and politicians of course never fully understood the gravity of the situation and continuously fought market repricing through liquidity adds and then piecemeal bailouts. In many ways the US regulators dragged their feet as well, but they were forced into "getting it" when the uncontrolled default ripped the banks apart. Thus far the Europeans have been able to stave off default because there were only 3 borrowers to prop up – Portugal, Ireland and Greece. The Europeans were able to do something the Americans were not – that is "buy time" for their banking system. And why could they do this – because of the concentrated nature of the lending. In Europe, there were only 3 large subprime borrowers (at least so far), so it was easy to front them their unsustainable payments – for a while. But time is running out. Of couse, the lenders (ie the banks) have always been dead men walking!
At the moment, the European policy makers – after much market prodding – have finally come to grips with the gravity of their situation. And having seen the US bailout movie, they know all too well what happens when a default of this caliber rips through the financial system. The reason the EFSF was created in the first place was so that there could be some form of a European TARP when the piper finally had to be paid and the defaults were let loose. Certainly many had hoped the EFSF could be set up as a US style TARPing mechanism (like our friend Chrissy Lagarde suggests). The problem of course is that there are 17 Nancy Pelosis and 17 Hank Paulsons in the negotiation process. And while the Germans are likely to approve an expanded TARP like structure on 29-Sep, it increasingly looks like it may be too little too late. The departure of Stark, the German court ruling on future bailouts/Eurobonds, the statements by the German economy minister and the latest German political polls all suggest that Germany is NOT interested a full scale TARPing and TLPGing process across Europe. They somehow think they will be better off with each country going at it alone.
The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place. Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way. The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks - even though it is probably a more cost effective solution for both the German banks and taxpayers.
Where the losses WILL occur is at the ECB, where the Germans are on the hook for the largest percentage of the damage. And these will not just be SMP losses and portfolio losses. It will also be repo losses associated with failed NON-GERMAN banks. Of course in the PIG nations, the ability to create a TARP is a non-starter – they cannot raise any euro funding. The most likely scenario for these countries is full bank nationalization followed by exit and currency reintroduction. Bring on the Drachma TARP!! The losses to the remaining union members from repo and sovereign debt write downs at the ECB will be massive (this is likely the primary reason why Stark left). It will require significant increases in public sector debt and tax collection for remaining members. And for the Germans this will probably be a more costly path. Nonetheless, politics are the driver not economics. There is a reason why German CDS is 90bps and USA CDS is 50bps – Bunds are not a safe haven in this world – and there is no place in Europe that will be immune from this dislocation. Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. Picking winners and losers will be VERY HARD but let's look at a few weak spots –SocGen 12b in market cap (-70% this year) with assets of 1.13 trillion BNP 31b in market cap (-55% this year) with assets of 2 trillion Unicredito 13b in market cap (-70% this year) with assets of 1 trillion Intesa 14b in market cap (-70% this year) with assets of 700b Compare this with the USA where we have – JPM 125b in market cap with assets of 2.1 trillion BAC 70b in market cap with assets of 2.2 trillion
Importantly, France GDP is only 2 trillion and in bank balance sheets are some 400% of that number. The banks are dead men walking with massive leverage to both home country income as well as assets. The governments are about to take charge and Europe as a whole is about to embark on a sloppy financial market socialization process that has been held back for nearly 2 years by 3 bailouts. The weak links will not be able to raise enough Euros/wipe out enough private sector equity to get this done, so there will be EMU members that need to exit and use a reintroduced currency for this process. We put a Greek drachma on the front cover of our Global Fixed Income Monthly 20 months ago for a reason.
