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Euro at $1.50 — a disaster or an alibi?
The French can never resist blaming a strong currency for their misfortunes. So it should come as no surprise that Henri Guaino, President Nicolas Sarkozy’s influential political adviser, has said that having the euro at $1.50 is “a disaster for European industry and the economy”. Since the euro stood at just above $1.49 as he spoke on Tuesday, Guaino presumably sees the single currency area as on the edge of the abyss.
This is manifest nonsense. European exports to the rest of the world, including the dollar zone, were booming in mid-2008 when the euro stood at just short of $1.60. The euro area had a trade surplus with the United States at the time. The steep slide in exports over the last 15 months has been due to a collapse in demand, even though the euro fell as low as $1.25.
A strong currency is not necessarily an economic handicap. West Germany’s export-fuelled post-war economic miracle was built on the foundation of a strong deutschemark.
A strong euro has kept the prices of imported commodities and energy under control and thus helped moderate inflation. That in turn enables the European Central Bank to keep interest rates low, benefiting industry.
Guaino forecast that the European currency’s against strength would become unbearable and Europe would have to react, most likely by printing euros, which would lead to inflation. That too seems improbable. If it were really worried by a strong euro, the European Central Bank could start by cutting interest rates, which are stuck at 1 percent — higher than U.S. or British levels. It could also intervene on currency markets, alone or in concert with other central banks, to buy dollars.
The ECB and other central banks intervened jointly in 2000 to stop the fall of the euro. The action was successful, putting a floor under the European unit. There has been no equivalent joint action in history to try to halt the dollar’s slide. But barring a disorderly dollar rout, which would not be in U.S. interests either, that may not be necessary.
Guaino should ask his countryman Yves-Thibault de Silguy, who was the European Economic and Monetary Affairs Commissioner at the time of the euro’s launch and is now CEO of French construction multinational Vinci. The company does 90 percent of its business in the euro area. So like most other big European corporations, it is relatively little exposed to dollar risk. Vinci has been using the strong euro as an opportunity to buy assets outside Euroland, notably in Britain — not because business is good (it’s lousy) but because assets are cheap and he can buy market share and prepare for future growth.
Anyone for cov-lite?
In our post-credit crunch era of avowed simplicity and rigorous credit analysis, you’d have thought that bond investors would be demanding tougher terms than ever to finance high yield companies.
Not at all, according to recent research by Moody’s on the growing European high yield bond market, where deal structures are looking rather toppy.
Moody’s highlights recent high yield deals by issuers such as Virgin Media and Wind, noting that the deals’ structures and documentation have in common some featuers seen in top of the market covenant packages from 2006.
For example, recent documentation allows companies in some cases to add back to cashflow items such as expected cost savings from restructurings. That could enable them to take on greater amounts of debt in their leverage tests, Moody’s says. The rating firm also notes that fallen angels who have been junked have continued to issue with investment grade-style debt covenants.
Moody’s notes:
“One might think that, in the aftermath of a severe market disruption, covenant structures would tighten, but this is not the case, either for the bonds of fallen angels or those of long-time high-yield issuers.”
The strength of the European bond market in recent months has been one of the few causes for optimism in the European capital markets. Much of the demand has been driven by a hunt for yield given the poverty of current deposit rates. It looks like investors may be getting sloppy again.
Reality arrives at The Rock
The surprising thing about Northern Rock’s decision to defer coupons on 1.6 billion pounds of its subordinated debt is the timing — arguably, it’s a miracle investors were getting paid anything at all.
The bank on Tuesday said it would stop paying coupons on various subordinated bank bonds, securities that count as regulatory capital.
The 12.625 percent subordinated notes fell to about 15-25 pence, down from as high as 50 before the announcement. Other tier 1 bonds that have been trading at around 20 percent of face for most of the year and fell below 10 today after being quoted around 15 last week.
While they all have differing terms and conditions, these bonds share the feature they can be deferred without counting as a default. That enables them to qualify as regulatory capital, the buffer banks must hold to absorb losses and protect depositors.
This feature meant Northern Rock might have deferred at any time since it was taken over by the UK government nearly two years ago. Bradford & Bingley, which the government broke up and placed into run-off, chose to defer coupons earlier this year.
The odds on Northern Rock following suit rose in July when the bank announced its capital position had fallen below regulatory minimum limits. The government now wants to restructure it by hiving off its dud assets into a bad bank. That will need state aid approval from the European Commission, which has become increasingly keen to see bondholders take their fair share of pain in bailed-out banks.
Market prices suggest there is some value left in the debt, perhaps if the debt is turned into equity or bought back at a discount.
Opel keeps hope alive
With General Motors in a Washington-guided bankruptcy and car makers around the world benefiting from government subsidies, politics has become firmly intertwined with the fate of the global auto industry. Even so, the deal reached in late May between General Motors and a group led by Magna International for GM’s European arm, Opel, smacked of trying too hard to come up with a politically convenient solution.
So the news that GM is now talking to other potential bidders is a welcome sign. Among the bidders are RHJ International, a publicly traded Belgian spinoff of the American private-equity firm Ripplewood Holdings, and Beijing Auto.
The German government had earlier favored the Magna proposal over one from Fiat because the bid stood to preserve more Opel jobs ahead of a September general election. And by having Russian partners, the bank Sberbank Rossii and GAZ, the carmaker, a Magna takeover promised to cement ties with an important market for Germany as well as Europe’s fastest-growing auto market.
But cutting costs and reducing capacity are the priorities for any automaker. And these Russian partners are far from ideal. GAZ is weighed down by $1 billion in debt. A 2006 GAZ acquisition, of British van maker LDV Group, has gone very badly, with LDV recently placed in administration.
With apparent snags in the talks with Magna, other bidders have now stepped up. There is now the chance of an improvement on the Magna group’s offer of 700 million euros for a 55 percent stake in Opel (GM would keep 35 percent, while Opel workers get 10 percent) — perhaps from Magna itself, if not the other potential bidders. And Fiat could reenter the fray.
The emergence of RHJ as a bidder is an intriguing prospect. Unlike the Russians or the Chinese, RHJ is presumably not motivated by improving and extending an existing auto empire, but sees some economic logic to taking a major stake.
Of course, RHJ may also be seeking subsidies or incentives from Berlin. While it is not the complete parts maker that Magna is, RHJ has controlling interests in the automotive companies Asahi Tec and Niles of Japan and Honsel International Technologies of Germany, as well as non-automotive interests in Columbia Music Entertainment and Phoenix Resort. And RHJ presents an interesting Wall Street connection: Ripplewood, which listed RHJ in 2005, was founded by Timothy Collins, who is a Lazard alumnus, as is Steve Rattner, who is overseeing the restructuring of the auto industry in the United States
Fold this fake bankruptcy, let GM organize normal. We going to loose 100′s of billions either way, so why not let GM start fresh, rebuild from bottom up. Remember, GM was lossing billions back before 2007 when the market was great. Please use bankruptcy to clean the slate, otherwise we and GM loose.
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The Wall
Yep, France should get its budget deficit under control – at 8% odd of PIB its far too high…But its a lot lower than many other countries in the EU, like Spain & Italy – or the UK (whwere the deficit will hit almost 13% of PIB)
And then of course there’s the good’ol USA with a budgetary deifict close to 14% of the entire economy. Og Well, whats good for the goose can’t be good for the ganders too…Countries can remain competitive traders with a strong currency for a time – but not forever. The US is a perfect example of that. And the time its taking to balance their trade deficit despite the plummeting greenback is a pefect example of that.