The Cypriot crisis, stemming essentially from a banking malaise, reminds us that Europe’s banking woes are far from over. In fact, Stephen Jen and Alexandra Dreisin at SLJ Macro Partners posit in a note on Monday that five years into the crisis, European banks have barely carried out any deleveraging. A look at their loan-to-deposit ratios (a measure of a bank’s liquidity, calculated by dividing total outstanding loans by total deposits) remain at an elevated 1.15. That’s 60 percent higher than U.S. banks which went into the crisis with a similar LTD ratio but which have since slashed it to 0.7.
It follows therefore that if bank deleveraging really gets underway in Europe, lending will be curtailed further, notwithstanding central bankers’ easing efforts. So the economic recession is likely to be prolonged further. Jen and Dreisin write:
Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.
RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.
Any hopes of policy support for the rand from the South African Reserve Bank (SARB) have vanished. The currency fell 1 percent after yesterday’s SARB meeting where Governor Gill Marcus made it clear she would not be standing in the way of the rand’s move south. It is now trading at 9.32 per dollar.
More losses look likely, especially if foreign bond investors throw in the towel, a move which analysts at Societe Generale liken to “the market equivalent of a volcanic eruption”. Foreigners, after all, own more than 36 percent of the 1 trillion-rand market in local currency sovereign bonds.
Victims of the dollar’s strength are piling up.
Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds’ problems are down to how EM currencies are performing against the dollar.
JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late (it’s up almost 4 percent in 2013 against a grouping of major world currencies) that’s unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets — South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.
LONDON (Reuters) – South Africa faces the risk of a huge exodus of foreign investors who are seeing the plunge in the rand’s value rapidly erode their stock and bond returns.
Africa’s largest economy has sucked in huge investments in the past two decades, but also has one of the world’s biggest balance of payments deficits – over 6 percent of its economy – and depends almost fully on portfolio capital to plug the gap.
Sterling looks likely to be one of this year’s big G10 currency casualties (the other being yen). Having lost 7 percent against the dollar and 5.5 percent to the euro so far this year on fear of a British triple-dip recession, sterling probably has further to fall. (see here for my colleague Anirban Nag’s take on sterling’s outlook).
Many see an opportunity here — as a convenient funding currency to invest in emerging markets. A funding currency requires low interest rates that can bankroll purchases of higher-yielding assets including stocks, other currencies, bonds and commodities. Sterling ticks those boxes. A funding currency must also not be subject to any appreciation risk for the duration of the trade. And here too, sterling appears to win, as the Bank of England’s remit widens to give it more leeway on monetary easing.
LONDON, March 20 (Reuters) – South Africa faces the risk of
a huge exodus of foreign investors who are seeing the plunge in
the rand’s value rapidly erode their stock and bond returns.
Africa’s largest economy has sucked in huge investments in
the past two decades, but also has one of the world’s biggest
balance of payments deficits – over 6 percent of its economy -
and depends almost fully on portfolio capital to plug the gap.
March 13 (Reuters) – India’s stubbornly high inflation must
come down to a 4 to 6 percent range, the country’s central bank
chief said on Wednesday, noting full implementation of this
year’s budget will have a “softening impact” on price growth.
“The Reserve Bank has to ensure that inflation is brought
down to the threshold level and is maintained there,” Duvvuri
Subbarao, the Governor of the Reserve Bank of India (RBI)told
students in London.
LONDON, March 12 (Reuters) – Sovereign wealth funds (SWFs)
are set to see their assets grow to $5.6 trillion by the end of
2013, a study found, a sum more than double British GDP and
underscoring their status as the world’s wealthiest investors.
SWFs, state-owned vehicles such as the Qatar Investment
Authority which manage windfall revenues for future generations,
have become key global market players after the financial
crisis, spending an estimated $90 billion buying up stakes in
Western banks including Barclays Plc for instance.
Inflation is finally biting Brazilian policymakers. The real strengthened around 1.5 percent last week without triggering the usual shrill outcries from government ministers. Nor did the central bank intervene in the currency market even though the real is the best performing emerging currency this year. The bank in fact shifted towards a more hawkish policy stance during its March meeting, a move that seems to have had the blessing of the government.
Friday’s data showed the benchmark consumer price index, IPCA, up 0.6 percent for a year-on-year inflation rate of 6.31 percent. President Dilma Rousseff, who faces elections next year, took to the airwaves soon after to reassure voters about her commitment to taming inflation, announcing a series of tax cuts. That effectively is a signal that there is now no political constraint on raising interest rates. According to the political risk consultancy, Eurasia: