Central banks and the next bubble
Central bank balance sheets are expanding at what some say is an alarming pace. Can this cause the next bubble to form and burst?
JP Morgan estimates G4 (U.S., Japan, euro zone and Britain) balance sheets are now around 24% of GDP combined, with around 11% of GDP comprising bonds held for monetary purposes.
“The recent pace of balance sheet expansion is the fastest since the immediate aftermath of Lehman, largely down to the ECB. The increased BOJ purchases, more QE in the UK, and 200 bln euros upwards of increased ECB lending from this month’s LTRO together point to a further $600bln+ rise in G4 central bank balance sheets this year, to around 26% of GDP.”
Outside G4, Switzerland is a country which saw a massive expansion in its central bank balance sheet. And because of its huge holdings, its balance sheet has been very volatile.
The Swiss National Bank suffered a loss of 21 bln francs last year — its biggest ever — due to currency interventions to weaker the Swiss currency. It expects to swing back to a profit of 13 bln francs this year.
Its acting chairman Thomas Jordan himself admitted: “Our profits have been and will be very volatile … because our balance sheet is four to five times as big as it was five years ago.”
Japan fires latest FX wars salvo; other Asians to follow
Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan’s massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September’s selloff. The won for instance is up 6.9 percent in October against the dollar — its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.
Despite the interventions, the yen ended the session more than 2 percent lower against both the won and the Singapore dollar, and most analysts reckon Japan’s latest intervention is by no means its last. That’s bad news for companies that compete with Japan on export markets and will keep neighbouring central banks watching for the BOJ’s next move. “Asian central banks are likely to play in the same game, and keep currencies competitive via regular interventions,” BNP Paribas analysts said.
But the race to the bottom has been underway for some time. After all central banks in the West have cut rates, as in the euro zone, and embarked on more quantitative easing, as in the UK. One bank, Switzerland’s, has gone as far as to effectively establish a ceiling for its currency. And in Asia, Indonesia surprised markets with an interest rate cut this month while Singapore eased monetary policy. Many expect South Korea’s next move also to be a rate cut even though inflation is running well above target. Analysts at Credit Agricole predicted this week’s G20 meeting to yield no fruitful discussion on what they termed “currency manipulation”. “This lack of co-ordinated policy could trigger an escalation in ongoing currency wars,” Credit Agricole analyst Adam Myers told clients. That would in turn lead to a renewed acceleration in central banks’ dollar reserves, he added.
from MacroScope:
New twist in Hungary’s Swiss debt saga. Banks beware.
A fresh twist in Hungary's Swiss franc debt saga. The ruling party, Fidesz, is proposing to offer mortgage holders the opportunity to repay their franc-denominated loans in one fell swoop at an exchange rate to be fixed well below the market rate. This is a deviation from the existing plan, agreed in June, which allows households to repay mortgage installments at a fixed rate of 180 forints per Swiss franc (well below the current 230 rate). Households would repay the difference, with interest, after 2015.
If this step is implemented and many loan holders take up the offer, it would be terrible news for Hungary's banks. The biggest local lender OTP could face a loss of $2 billion forints, analysts at Budapest-based brokerage Equilor calculate. Not surprisingly, OTP shares plunged 10 percent on Friday after the news, forcing regulators to suspend trade in the stock. Shares in another bank FHB are down 8 percent.
But Fidesz' message is unequivocal. "The financial consequences should be borne by the banks," Janos Lazar, the Fidesz official behind the plan says. The government is to debate the proposal on Sunday.
OTP and its peers could be forgiven for feeling aggrieved. They are already saddled with the highest financial sector taxes in Europe and will almost certainly see a rise in bad loans as the economy stagnates and more Hungarians lose their jobs. They are also picking up the cost of the three-year exchange rate cap for mortgage holders.
The proposed plan may also have implications for the forint -- ING Bank chief EMEA economist Simon Quijano-Evans notes that if 200,000 to 300,00 people to take up the new offer -- as the government apparently expects -- the forint will weaken as these people buy Swiss francs to repay their debts. Based on average loan size, over 2 billion euros worth of forints could be sold, he estimates.
Banks' main hope now must be the central bank. The latter has responded to today's proposal with a warning that solutions to the debt crisis must not threaten the financial system's stability.
But the Fidesz government's capacity to spring nasty surprises on the banking sector will make investors even more defensive about Hungary. Quijano-Evans for one advises staying away from Hungarian equities and unhedged forint positions, noting that "the risk of the government going ahead with some sort of plan to the detriment of banks has increased strongly."
Sliding over troubles
Bond yields are on the rocks, prices are hitting the steepest slopes and credit derivatives are at an impasse. So what better way to spend the time than to join 200 bond traders for a skiing weekend in Switzerland?
Throwing caution, and the global financial crisis, to the winds, the International Capital Market Association, the self-regulatory organisation for capital markets, is holding its annual ski weekend in the Swiss resort of Villars, “set on a sunny plateau above the Rhone Valley, with superb views over the Vaudois Alps”.
The association has been running ski events for members for over 30 years. “A packed programme of outdoor activities and entertainment starts with the welcome drinks and dinner on Friday evening … and gets into full swing with racing on Saturday.”
The other side of bank secrecy
For many, the words bank secrecy and offshore centre tend to raise James Bond-like scenarios of illicit bags of cash smuggled across the border to be locked away in a coded safety box. But often the rich of this world have legitimate reasons to open a protected bank account in Switzerland or other tucked-away offshore locations. Some, like the residents of oil-rich Gulf countries, do not even have worry about the tax man as these nations are largely tax free. “Offshore does not mean that the money is undeclared,” said Jonathan Ivinson, head of tax at international law firm Hogan and Hartson. Despite a global crack-down on money-laundering and tax evasion, bankers say many affluent clients from places like Latin America will continue to keep their money away, safe from a potential coup. In countries where corruption is rife, people would rather not let their local banker know how much money they earn for fear of kidnapping. “It obviously depends a lot on how worried, how unhappy you are about the jurisdiction you live in,” said Prince Max, the second son of Liechtenstein‘s ruling monarch and the head of the country’s largest bank LGT. ”If you live in a highly volatile and unstable country it is very rational for people to address this risk.” - Lisa Jucca
Give and take in Switzerland
Switzerland prides itself for being a reasonably generous country. Each year it gives 1.2 billion Swiss francs, or about 0.4 percent of its gross domestic product, in aid to poorer countries, a higher portion of aid than larger states such as Britain.
But what you get with one hand …. According to estimates by the Berne Declaration, a Swiss non-profit organisation, the poorest nations’ wealthiest have hidden between about 360 billion and 1.5 trillion Swiss francs in Switzerland, away from the taxman. This means that each year, between 5.4 billion and 22 billion Swiss francs are lost to tax authorities in developing countries, equivalent to at least five times what Switzerland gives to those countries in aid.
“Tax dodgers in developed and developing countries deprive governments of revenues,” OECD Secretary General Angel Gurria said last month, adding that if this tax money was collected billions of dollars would available for financing development. (Lisa Jucca)
