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from Global Investing:

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece -- rising debt and weak economic growth pushing the country to seek a bailout -- as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.

According to JP Morgan's calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.

from MacroScope:

Creaky credit markets

It's not a snap or even a pop – but there's definitely a crackle. Rumblings emerging from key credit markets bare a frightening resemblance to the early days of the 2008 credit crunch.

Take commercial paper, a widely used instrument for short-term funding in the corporate world. Financial sector issuance of commercial paper fell steadily in the second half of last year, from around $556.5 billion in July to $434.4 brillion in December.  The final month of the year saw the downward trend spilling over into other industries.

Paul Ashworth at Capital Economics:

The contraction in commercial paper issued by the financial sector is now being compounded by a dramatic drop off in commercial paper loans to the non-financial sector.

Despite the European Central Bank’s renewed effort to keep bank liquidity ample, money markets have shown some signs of strain. The London Interbank Offer Rate or LIBOR, used for loans between banks, more than doubled in the last six months of the year to its current 0.55 percent as worries mounted about the health of European institutions.

Anthony Crescenzi, portfolio manager at PIMCO:

Liquidity risks by no means have been eliminated because liquidity provisions are no substitute for private capital nor the transference of risk to either the private-sector or the central bank.

For inter-bank rates, this means that while rates might be capped by the cost of borrowing from the Fed and the ECB, no substantial decline in rates is yet likely either until an external balance sheet is drawn into the mix or there is a miraculous endogenous recovery in the wholesale funding market and Europe’s banks therefore regain market access.

from Summit Notebook:

Can a U.S. regulator simply talk banks into lending? FDIC’s Bair is trying

When a regulator talks, do banks listen?

Banks are returning to profitability after the financial crisis and the head of the Federal Deposit Insurance Corp is trying to nudge them into lending again.

"You can't force them to lend," FDIC chairman Sheila Bair says. "But I think jawboning helps."

The U.S. banking industry reaped big profits in 2010 as the financial crisis faded further into the distance.

If all the regulator can do is try to talk them into increasing lending, why should banks listen?

"Well, they don't need to," Bair said at the Reuters Future Face of Finance Summit.  But banks do listen to regulators, the healthier institutions will be "leading that charge" before others, and it would be a bad idea to try to force lending, she said.

Bair, who is leaving the FDIC in June, says people tend to overestimate the power of a regulator.

from MacroScope:

ECB stuck feeding southern Europe’s cash addiction

Commercial banks in southern Europe are increasingly addicted to cheap central bank money after dealers shut them out of money markets. Due to this dependency, the European Central Bank will have little option but to keep offering banks cold hard cash for almost nothing - currently it prices its loans at 1.0 percent.

Economic growth in the euro-zone core has been robust lately, but southern Europe has been hit hard on several fronts recently and is falling badly behind. First, the sovereign debt crisis hit Greece and other southern periphery countries, then bank stress tests showed 6 out of 7 failing banks were in Spain or Greece, and then the region posted only tepid economic growth.

Bank borrowing from the ECB shows increasing strains in southern euro-zone's financial sector while banks elsewhere are getting back on their feet, but the fear of contagion from country to country will keep the ECB on its toes. Banks in Greece borrowed twice as much last month as they did in July 2009, even though outstanding central bank lending fell 18 percent over the same time. Banks in Portugal borrowed five times as much in July 2010 as they did a year earlier, and borrowing also rose in Spain and Italy.

"The full-allotment fixed-rate repos will stay well into next year," said Michala Marcussen, Societe General chief economist. "Beyond the first quarter of next year, the overall economic environment will be the key determinant in how much longer it gets carried. In all likelihood it could get carried further ahead."

The ECB tried to reintroduce limits to borrowing in April but was forced into a U-turn by the sovereign debt crisis, returning to its full allotment policy in May. Fourth-quarter plans are due to be revealed in September, with markets expecting full allotment to continue.

Among the ECB's 22 Governing Council members, Cyprus's Athanasios Orphanides and Ireland's Patrick Honohan have indicated the unlimited funding should continue, and on Friday Germany's Axel Weber made clear exit discussions should not resume until early next year. His dovish tone got analysts' attention.

from Financial Regulatory Forum:

EXCLUSIVE – China tells banks to ensure loans are used properly

SHANGHAI, Feb 1 (Reuters) - China's banking regulator has ordered lenders to conduct checks on whether any of their loans have illegally gone into the stock or property markets, a banking source told Reuters on Monday, the latest step in a clampdown on excessive lending and rising asset prices.

Credit found used for improper purposes must be withdrawn within a certain period of time, said the source, who had seen the relevant notice from the regulator. He did not elaborate on the timeframe.

The order from the China Banking Regulatory Commission (CBRC) marks further efforts by Beijing to rein in rampant lending and ensure that credit is being used to generate genuine economic activity and not simply to fuel speculation in stocks and property.

"The CBRC has recently found that some banks have loosened management of their lending practices, some industrial companies have illegally used bank credit to invest in stocks and property, while some individuals have used consumer loans to trade stocks," said the source.

It is not unusual for the CBRC to issue such orders, though it is unclear how it will actually implement them.

For instance, it leaned on banks to cut back on short-term bill issuance last year after a spike in such credit at the start of the year, and has said in public statements over the past year that loans must be used for real economic purposes such as investment or purchasing property or goods.

Still, the order follows a series of steps over the past weeks to curb credit growth, demonstrating authorities' seriousness about preventing a flood of credit that could fuel asset price bubbles and rising inflation expectations.

from Breakingviews:

China gets growth and a nasty dilemma

Chinese Premier Wen Jiabao once said 2009 would be China’s toughest economic period in fifty years. He wasn’t thinking ahead. In 2010, policymakers face a seemingly impossible mission – continuing 2009’s growth of 8.7 percent while curbing resurgent inflation. December’s figures show the government is already behind the curve.

The annual inflation rate for consumer prices was a seemingly mild 1.9% in December. But that number understates the threat. The consumer price index excludes the rapidly rising cost of property. And year-on-year changes miss the most recent trend. In the most recent month, prices rose 0.8 percent – a nerve-wracking 10 percent annualised rate.

Food prices, which made up 90 percent of December’s annual CPI increase, are rising fastest. Bad weather doesn’t help. But easy money is what turns shortages into much higher prices. Producer prices are now rising at an annualised 11 percent. Those increases are being passed on to consumers – China’s two leading alcohol brands have raised prices by around 10 percent and Coca-Cola is threatening to follow suit.

Non-food prices are not exempt either. Makers of cars and home appliances face rising costs and are no longer under pressure to cut inventories through cut-price sales, not after respective 58 and 25 percent revenue increases in December. Price rises look inevitable.

Welcome growth and excessive inflation have the same monetary source – a flood of bank lending. A rate hike would now be the best medicine, but it comes with uncertain and possibly hazardous side effects. Fragile parts of the economy, like private investment and services, could be hurt. Some debt-funded construction projects – there was a mammoth 4 trillion yuan ($586 billion) of infrastructure investment in 2009 – could be delayed.

There are other buttons Beijing could push, but they are no more attractive. Revaluing the too-cheap yuan would cut producers’ imported commodity bills, protect consumers from some price hikes and curb speculative liquidity from overseas, but at a cost of export jobs. Premier Wen may yet yearn for the halcyon days of “tough” 2009.

from Financial Regulatory Forum:

BREAKINGVIEWS-China’s tightening still embryonic

-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG, Jan 20 (Reuters Breakingviews) - The world is nervous about China putting the brakes on its bubbling financial system. Beijing has this week ordered some banks to slow their lending. Markets did not take it well. But as tightening goes, the moves are pretty limited.

Some 1 trillion yuan ($161 billion) of new loans were already advanced during the first half of January, compared with 1.6 trillion yuan for the first month of 2009. That is well above the pace that the authorities' 2010 loan limit of 7.5

trillion yuan for the current year implies.

For the banking regulator, timing may be as important as actually curbing lending. Last year, almost half of all new loans were given out during the first three months, creating wide fluctuations in the economy. The authorities want 2010 to be smoother. The increased reserve requirements for some lenders

will expire after three months, letting them lend more later in

from The Great Debate:

China tightening could undo risk markets

The key decision for global markets in 2010 will very likely not be made in Washington but Beijing, where emerging inflation and a property bubble may push China to begin reining in expansionary policies earlier than will suit the developed world.

After returning to a breakneck pace of growth with amazing speed, there are already signs that China is weighing steps to curtail the bank lending that has been a huge source of stimulus, helping to drive property and other asset prices sharply higher.

"We emphasize the role of the reserve-requirement ratio, although the ratio was internationally seen as useless for years and it was thought central banks could abandon the tool," Chinese central bank Governor Zhou Xiaochuan said at a Beijing conference on Tuesday.

"Besides benchmark interest rates, we also put emphasis on managing the gap between deposit and lending rates", Zhou said.

Put simply, that implies that China may take steps to limit the amount of money banks are allowed to lend and to drive the margins between what they pay in interest and what they charge higher, both steps which will cool growth and speculation.

China's central bank on Wednesday followed up by promising to exercise tighter control over bank lending next year while reaffirming a long-standing pledge to maintain "appropriately loose" monetary policy.

Even if you don't own a million dollar apartment investment in Shanghai -- kept empty of course because cash flows are for the little people - this could spell trouble.

from Financial Regulatory Forum:

U.S. says banks getting help cut lending in July

WASHINGTON, Sept 15 (Reuters) - The U.S. Treasury Department said on Tuesday that banks receiving government bailout funds cut their new lending by 10 percent in July. A monthly survey of lending activities at the top 22 banks that have received capital injections showed their overall outstanding loan balance was down 1 percent from June to July because of less demand from borrowers and charge-offs by banks, the Treasury said. "Total origination of new loans at the 22 surveyed institutions decreased 10 percent from June to July," the Treasury report said, adding that the value of new loans by all the banks was about $282 billion in July. The decision to pump taxpayers' money into banks was motivated largely by lawmakers' wish for banks to keep lending, but a sluggish economy and more cautious consumers appear to be leading to more cautious use of credit. Treasury said banks again reported that demand in the commercial real estate and the commercial and industrial loans markets "is well below normal levels," adding that "none of the respondents predicted change in demand in the near term." Banks said real estate developers were reluctant to begin new projects "under current poor economic conditions, which include a rising supply of office space as firms downsize and vacancies rise." In addition, total credit card outstanding balances fell by 1 percent from June to July, indicating that consumers were spending conservatively and paying down balances. "Job losses, generally low levels of consumer spending and higher savings rates contributed to the decline in credit card balances," Treasury said. (Reporting by Glenn Somerville; Editing by Leslie Adler) ((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net)) Keywords: USA TREASURY/LENDING

Tuesday, 15 September 2009 22:52:52RTRS [nN1579620 ] {C}ENDS

from Financial Regulatory Forum:

China asks banks to curb month-end lending -bankers

    SHANGHAI, Aug 28 (Reuters) - China's banking regulator has given Chinese banks verbal instructions that they must not rush into end-of-the-month lending as the close of August draws near, bankers at several Chinese banks told Reuters on Friday.    The China Securities Regulatory Commission used traditional government "window guidance", in which authorities tell Chinese institutions how they should act in line with government policies, to guide the banks to avoid lending excessively, the bankers said.    Banking sources told Reuters that Chinese banks had only lent around 200 billion yuan ($29 billion) so far this month, with the biggest four state-owned banks lending around 100 billion yuan.    If lending in August remains at that level, it will lag far behind 360 billion yuan in July and a monthly average of more than 1 trillion yuan in the first six months of this year.    "Most banks have been very cautious in lending so far this month, and they had hoped to lend more late in the month to compensate," said a banker at a major state-owned bank.    "But the regulator's window guidance dashes hopes for an end-of-month rush." (Reporting by Victoria Bi and Edmund Klamann; Writing by Lu Jianxin)  ((jianxin.lu@thomsonreuters.com; +86 21 6104 1792; Reuters Messaging: jianxin.lu.reuters.com@reuters.net)) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com)) Keywords: CHINA BANKS/LENDING     Friday, 28 August 2009 06:27:43RTRS [nSHA304109] {C}ENDS