A scar on Bahrain’s financial marketplace
Bahrain’s civil unrest — which had a one-year anniversary this week — has taken a toll on the local economy and left a deep scar on the Gulf state’s aspiration to become an international financial hub.
A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain’s efforts in the past 30 years to diversify its economy and develop the financial centre.
Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.
Unlike DIFC (Dubai International Financial Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis. Bahrain’s reluctance to hire non-resident talent has made Dubai…an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide… The constraints – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and potential to become the financial gateway in the Middle East.
Then came the crackdown of protesters.
Its ruling Al-Khalifa family unleashed a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address citizens’ grievances. These led not only to international opprobrium of the Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting workers and operations to Dubai… Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.
It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.
Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to threaten the hard work of more than 30 years.
Bahrain’s sovereign wealth fund Mumtalakat, which is leading the country’s efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.
from MacroScope:
Are CDS markets the euro zone’s iceberg?
In an unfortunate turn of phrase at the height of his country's current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government's Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great "unsinkable" ended up almost a century ago and I'm sure, given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?
For some euro politicians, look no further than the sovereign Credit Default Swaps market. France's finance chief Christine Lagarde said as much last week when she questioned "the validity, solidity of CDSs on sovereign risk" and warned speculators to be careful as regulators took a "second look" at the market and European governments closed ranks. Lagarde, of course, is not alone. You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the "murky manoeuvres" in the debt markets. But what is the exact charge against CDS?
CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It's a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you're insuring against. Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.
About 10-years old, CDS were for years seen as a valuable bellwether of sentiment on corporate default risk. But its opacity as an over-the-counter market came in for heavy criticism during the credit crunch, mainly because it allowed speculators with no interest in the underlying securities to sow panic in the real marketplace, particularly in banking stocks, and offered them the power to precipitate the very crises they were betting on. There were also cases, most notably in attempts by Kazakhstan's then biggest bank BTA to restructure its debts, where conflicts of interest were alleged. Some bondholders acting as creditors stood to gain more from forcing the bank default because they were substantial CDS holders too. What's more, Commerzbank points out, many even doubt the sense of sovereign CDS markets at all because it's far from clear who would pay out in the event of default. Insurer AIG was certainly unable to pay when the financial industry went south in 2008.
One defence of CDS is they merely allow a liquid market to anticipate future credit rating moves rather than outright defaults per se and, as such, are important not in their absolute but in their relative rankings of credit. Greek CDS prices last week indicating a one-in-three chance of default, for example, were wildly at odds with a consensus view such an outcome was highly unlikely. Yet, Commerzbank said that even the acceptance of sovereign CDS as a useful market signal still exposed some odd anomalies, such as German CDS trading cheaper than the US when the US and not Germany had control of its own printing presses.
Barclays Capital have burrowed deeper with a note called "Sovereign CDS: Cat or Canary?" They concluded that both CDS exposures and volumes are just fractions of the cash bond markets for the likes of Greece, Spain, Ireland, Italy and Portugal -- only between 2% and 10% on exposures and 1% to 12% on volumes, with Portugal showing the highest CDS to cash bond ratios. And although there was a correlation between CDS volumes and widening cash bond spreads, this was unsurprising and showed no cause and effect.
However, Barclays did point out the CDS market appeared skewed toward fear and volatility. "CDS activity drops quite a bit when spreads tighten. This would suggest that the CDS market tends to be dominated by players who are looking to buy protection," it said, adding that this was even more likely in markets like Greece where the absence of centrally-cleared cash repo markets makes many players reluctant to "short" the cash market.
Act now or forever hold your (b)-piece, Obama
It appears the penny has finally dropped in Washington.
Bank bailout watchdog Elizabeth Warren, chair of the Congressional Oversight Panel, has unveiled a report that outlines the perilous state of the U.S. commercial mortgage sector, which left unaided could spark “economic damage that could touch the lives of nearly every American”.
The Havard Law School Professor and her panel colleagues are talking the kind of apocalyptic language that may just shock the White House and its star policy advisers into facing problems banks have now rather simply obsess about those they may or may not encounter in the future.
The global banking system may well need some kind of Volcker-esque guidelines to curb the next generation of excessive risk-takers but critics say Obama is putting the cart before the horse in his efforts to haul the economy back on track.
Certainly, the U.S. government has toiled long and hard to stabilise the U.S. housing market, like propping up Fannie and Freddie and their dysfunctional offspring, but the subprime mess has distracted attentions from the toxic commercial market, where the clean-up task is no less important.
Warren reckons there is about $1.4 trillion worth of outstanding commercial real estate loans in the U.S that will need to be refinanced before 2014, and about half of them are already “underwater,” an industry term that refers to loans larger than the property’s current value.
But some believe bank brains are wasting too much time figuring out how the so-called “Volcker rule” might affect their operations and future profitability, instead of getting their arms around the real estate loans that could snap their institutions in two long before the anti-risk measures even take hold.
has it ever occured to people that the Obama administration is not there to fix anything ? just asking
Bosch Boss Bashes Bloated Bank Bonuses
Everyone complains about fat banker bonuses, but Bosch Chief Executive Franz Fehrenbach is taking the debate to a new level. The head of the world’s biggest car parts maker is going to review ties with its financiers and may break off business with those that pay excessive bonuses, he told reporters. “We find it irresponsible if some big banks more or less go back to business as usual before the crisis despite what we have gone through,” he said. He cited HSBC and JP Morgan as positive examples of good corporate behaviour. Of course it’s easier to be picky when you are unlisted and generate huge cash flow.
Austrian subprime woes turn into political hot potato
The Austrian government debt agency’s two-year old foray into subprime investments has turned into a political hot potato and sparked an increasingly heated debate between the Social Democrats and conservatives, caught in an uneasy but coalition government without viable alternative.
Austria’s audit court last week revealed that the agency, which in its staid day job issues government bonds and makes sure state coffers are full when they need to be, started to moonlight on money markets in 2002 to earn a little extra money on the side.
Its cash position ballooned from an average 4.5 billion euros in 2002 to a peak of 26.8 billion euros in October 2007. This level “was not only determined by economic necessities, but was also meant to generate additional revenues,” the audit court said in its report.
Sure enough, as much as 10.8 billion euros went into asset-backed commercial paper (ABCP), a class of structured investments that became disreputable when the subprime crisis broke out in 2007. Luckily, the debt agency got away only slightly bruised, with up to 380 million euros in possible losses from those investments.
Even though the loss looks manageable (it equals 0.13 percent of Austria’s GDP), and no rules seem to have broken, two former and the current finance minister – all conservatives – as well as the agency itself find itself at the centre of a debate seeking someone to blame.
The conservatives were caught slightly wrong-footed. Still basking in election successes based on voters’ perception that they, rather than the Social Democrats, were the safe pair of hands to steer the country through the economic crisis, they suddenly faced charges of gambling away taxpayers’ money.
Karl-Heinz Grasser, under whose reign as finance minister the agency’s side business started, and whose life after politics mainly consisted of modelling and launching an ill-fated joint venture with coffee-roasting heir and banker Julius Meinl, said the losses didn’t happen under him – dodging the question why the side business was started in the first place.
from UK News:
Walking the risk-reward tightrope in Iraq
It's fair to say that investing in Iraq is not for the faint-hearted.
Just last week more than 200 people were killed in suicide bombings across the country, while kidnapping and armed assault remain commonplace.
That said, more than 600 delegates still turned up to the Invest Iraq 2009 conference held in London this week, eager to find out what opportunities there might be in the oil, construction, petrochemicals, engineering, agriculture, transport and tourism industries, to name a few.
From City of London bankers to executives from Shell and Chevron, bosses from energy service companies and airport construction firms, management training specialists and security advisers, they were all there, milling around a west London hotel in their smartest suits, seeing what business they might be able to do.
There were plenty of Iraqis too. Mostly businessmen with operations outside the country -- in Lebanon, Jordan or Dubai -- and now looking to step up investment in their homeland.
Some of them, perhaps feeling more familiar with the lay of the land than Western investors, had already made sizeable moves into Iraq, but judging from the questions they were putting to the Iraqi officials speaking at the conference, they were concerned about a lack of legal direction from the government.
One Iraqi was particularly illustrative of the potential pitfalls that can befall investors.
from Davos Notebook:
Hank Paulson is not Gavrilo Princip, Lehman is not the Archduke Franz Ferdinand
Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.
Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:
"My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles' and if you can change one thing in the story it would have a happy ending.
It's like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn't have been a First World War.
If you go through the events of September of last year you will find it incredibly hard to produce a counterfactual scenario in which it could have been possible to save both Merrill Lynch and Lehman. There is one bank which could be bought by Bank of America but there couldn't have been two.
This is a crisis of too much bank leverage which began in August of 2007 and indeed had it roots far before. A bank leveraged 25-1 only needs a 4 percent decline in their assets to have their equity wiped out. And the notion that saving one investment bank could somehow have prevented or mitigated the crisis is a fantasy. The problem would have happened at some point somewhere else. There is a fundamental problem of bank solvency."
Ferguson argues that without another buyer for one of the two, one would have needed to have been taken into a kind of Treasury conservatorship, as Fannie Mae and Freddie Mac were. But those were already quasi-government and such a move would have required Congressional approval, which given that Congress turned down the first version of the TARP, was not likely.
Davos 2009 Conference Shows The World At An Economic Crossroads……
http://wcgfairfield.blogspot.com/2009/01 /davos-2009-conference-shows-world-at.h tml
from James Saft:
Balance of power upended at Davos
So, back we go next week to Davos for the World Economic Forum 2009, titled this year "Shaping the post-crisis world."
Except the crisis ain't over yet and shaping the world while it is happening is proving to be about as easy as tying your shoes while riding a bicycle.
Let's dial back briefly to those more innocent days in 2008 and remember what was being discussed at Davos then.
Q - Will Sovereign Wealth Funds save the world financial system through equity investments? Are they a menace?
A - No, and even if they are it doesn't much matter.
Q - Isn't this just about a bunch of red-neck American sub-prime borrowers and the banks that were dumb enough to lend to them?
A - No and no. It is all of us, every one, and if the heart isn't pumping sooner or later the limbs stop moving.
