Tagged: Sovereign debt

Ireland in Bailout Talks with EU?

As Ireland’s borrowing costs have been pushed to record highs, it is in talks with EU officials to claim bailout from European Financial Stability Fund (EFSF). The EFSF was agreed upon by the EU and the IMF in June as a safety net to help prevent indebted Eurozone countries from slipping into debt crisis, in response to Greece crisis.

Ireland mapUnder the EFSF the 16 states of the Eurozone will provide 440 billion euros, in emergency loans to rescue crisis hit countries. The EFSF also constitutes 60 billion Euros from all 27 EU countries and 250 billion euros from the IMF, totaling to about 750 billion euros or one trillion dollars.

Greece was the first country to receive emergency loan from the combined package of the EU and the IMF in June 2010. Now Ireland is on the verge of knocking EMSF’s door. Reuters quoted two unnamed official sources from EU authorities that Ireland was in talks with EU officials to discuss aid mechanism. But, the aid may be announced only in the first week of December.

Ireland is said to be well funded until the first half of the next year, so the aid will not be associated with haircuts like in the case of Greece.

However, Ireland denies that it is in talks with the EU, confirmed by the EU commissioner Jean Claude Trichet. The IMF managing director said he was not approached for aid to Ireland and added Ireland can manage its finances. Ireland was once the highest growth country among the Eurozone countries during first ten years since the Eurozone formation. Now it has budget deficit equal to 32% of its GDP, the highest among EU countries. It is more than ten times to the limit imposed by the Eurozone monetary system, i.e. 3 percent of GDP.

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U.S. investors still cool on Euro banks after test

Reuters | Sat Jul 24, 2010 | 11:31am IST

Valuations on Europe’s banking sector may look cheap on paper but don’t expect U.S.-based portfolio managers to scoop them up even after stress tests showed a vast majority have sufficient capital. The results of Friday’s assessment, criticized for not being tough enough, found that just seven out of 91 European banks would need to bolster their balance sheets by a total of 3.5 billion euros ($4.5 billion) to withstand another recession. "To us the bank stress test results came out as a non-event. When you look at the results they didn’t look very stressful," said Scott Snyder, portfolio manager of the ICON Advisers Europe fund. The method of the stress test has drawn scrutiny particularly because of the way the tests treated European government debt. Even so, U.S. investors had already shown distaste for the European banking sector as data reveal the massive net selling that has occurred over the last two years.

U.S. mutual funds cut their holdings of publicly traded European banks identified in the tests to just $12.1 billion from $29.8 billion, a whopping 59.2 percent decline in the last two years through May, according to Lipper, a Thomson Reuters company. The bulk of the sell-off was between 2008 and 2009. However even after the U.S. government conducted its own stress tests in May of last year — widely believed to have put a floor underneath U.S. financial shares — holdings in Europe’s banks continued to decline. "It stands to reason the most visible banks in Europe are the most scorned, perhaps because we know more about them. The holdings of ING, Bank of Ireland, Commerzbank, and Royal Bank of Scotland used to account for $4.4 billion in account assets. Now they are less than $800 million," said Jeff Tjornehoj, U.S. and Canada research manager at Lipper. By comparison, U.S. bank shares, as measured by Standard & Poor’s financial index, have risen 13.57 percent since the U.S. government announced its stress test results on May 7, 2009, through Thursday.  

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Success for Bank Stress Tests Hinges on Data, Not Failure Count

Bloomberg | Jul 23, 2010

Olli Rehn The success of the European Union’s bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail, investors said. “The more transparency, the more important that the results will be,” said Peter Braendle, who helps manage $51 billion at Swisscanto Asset Management in Zurich. “If the methodology is a black box and we just get some results that will not be very helpful.” Regulators are scrutinizing banks to assess if they have enough capital, defined as a Tier 1 capital ratio of at least 6 percent, to withstand a recession and sovereign debt crisis, according to a document from the Committee of European Banking Supervisors. Lenders that fail the trials will be made to raise additional capital. The results will be published by CEBS and national regulators starting at 6 p.m. Brussels time today.

The assessors haven’t so far provided full details of their criteria raising concern among investors they will not be stringent enough. U.S. regulators published the metrics they used to test their banks before they released their results last year. U.S. bank stocks rallied 36 percent in the seven months following the trials. Governments are publishing the results of the region’s first coordinated stress tests as they seek to end concerns about the health of the banking system almost three years after the subprime crisis roiled global financial markets. The 54- member Bloomberg Europe Banks and Financial Services Index has risen 9.3 percent this month, boosted by optimism that lenders will pass. By comparison, the U.S. Standard & Poor’s Financials Index has gained about 4.7 percent.

‘Create Your Own’

“It’s pretty clear that a lot of banks will pass this test,” said Lutz Roehmeyer, who helps manage about $15 billion at Landesbank Berlin Investment, including bank shares. “It will be more important to see what raw data will be published. With that you can create your own, more stringent scenarios.” Ten of the 91 banks being tested are likely to fail, Goldman Sachs Group Inc. analysts said in a note to clients today, citing their own survey. Analysts’ estimates for the amount of capital European banks will need to raise range from 30 billion euros ($38.7 billion), according to Nomura Holdings Inc., to as much as 85 billion euros at Barclays Capital. Investors have criticized the tests, saying they may not be rigorous enough. In particular, they are questioning to what extent regulators are examining banks’ sovereign-debt holdings, including how government bonds in the trading and banking books will be valued in the event of a sovereign debt crisis.  

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Greek Default Unavoidable Without More Aid, Jen Says

Bloomberg | April 7, 2010 | 09:49 EDT

Greece may default on its debt as early as this year without “extraordinary” financial assistance from the European Union and International Monetary Fund, said Stephen Jen at BlueGold Capital Management LLP. The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, as the government enacts austerity measures to narrow the European Union’s biggest budget deficit, Jen, managing director at the hedge fund, said today in an interview in London. That may drive the Mediterranean nation into a recession, he said. “A default may be ultimately unavoidable,” Jen said. “That eventuality may only be postponed by aid many times bigger than the 25 billion euros ($33 billion) people have in mind.” Any assistance needs to “impress the market,” he said.

Greek bonds fell for a second day, driving the premium investors demand to hold 10-year securities instead of benchmark German bunds to 407 basis points, the most since 1998. Market News International said yesterday the country wants to bypass IMF involvement in any EU-sponsored rescue because terms for aid would be too stringent. A Greek government spokesman denied the nation aims to exclude the IMF. Today’s declines pushed the yield up 12 basis points to 7.15 percent as of 2:48 p.m. in London. The spread averaged about 65 basis points in the five years through November before concern deepened that the country’s deficit would swell.    Continue reading