http://www.zerohedge.com/news/2013-07-25/detroits-fallout-muni-illiquidity-and-full-faith-and-credit-failure
Submitted by Tyler Durden on 07/25/2013 18:56 -0400
http://www.zerohedge.com/news/2013-07-25/cyprus-deposits-plunge-fastest-rate-ever
Submitted by Tyler Durden on 07/25/2013 11:32 -0400
Detroit's Fallout: Muni Illiquidity And Full-Faith-And-Credit Failure
Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history. Detroit’s filing is arguably an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape; but, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward. The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market. In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary
market is almost non-existent.
market is almost non-existent.
Via Guy Haselmann (ScotiaBank),
Municipal finance is in sharp focus after Detroit filed the largest municipal bankruptcy in history and with analyst Whitney warning of more to come. At the moment, Detroit’s (relatively small) $18 billion in GO (general obligation) bonds have had few ripple effects on the $3.7 trillion US municipal market, or on the $100 trillion of global fixed income securities. However, this bankruptcy could eventually lead to significant reappraisals of credit risk, higher funding costs, and legal precedents pertaining to debt creditors and pension ‘guarantees’.Many fiscal stresses have roots originating from the duplicitous incentive system of elected officials who over the past several decades promised future perks to state and local public employees, but who leave the fulfillment of those promises to successor governors or mayors. In New Jersey for instance, Governor Chris Christie inherited an underfunded pension, mostly caused by 22 years in a row of preceding Governors not paying into the pension system the full amount allocated in the State’s annual budget. Part of Christie’s high popularity in NJ and across the US is due to his plan to save the pension system – a plan that passed the state legislature with bi-partisan support.Most US cities and states have not made much progress in addressing the legacies of those future promises. Making matters worse is the fact that municipal finances (in recent years) have run deficits despite constitutions that require balanced budgets. Reduced federal subsidies and low economic growth rates after the 2008 financial crisis have further impaired budgets. To bridge the gap, spending cuts are often made to basic social services such as education, road and park maintenance, infrastructure projects, or police and fire. Cuts to pensions or bond creditors are typically skirted due to legal protections.Michigan’s governor appointed an emergency manager who proposes paying Detroit’s GO bondholders less than 20 cents on the dollar. As for the pensioners, the state constitution refers to accrued pension benefits as “contractual obligations which shall not be diminished or impaired”; yet, with a $9 billion underfunded gap,pensioners expect cuts. At some point, a judge is likely to make a ruling on the legality of cuts to creditors or pensions which could have an impact on market premiums and other public pensions. (The PEW Research Center estimates US pension underfunding as high as $3 trillion).GO bonds are viewed as relatively safe securities because they are seen as being in the first lean position and ‘guaranteed’ by the taxing authority of the municipality. When problems develop, cuts in services happen, even as taxes rise. The combination drives out residents and businesses. The erosion to basic social services often leads to drops in home values and rising crime, further setting off a negative feedback loop. Therefore, the ability to tax or cut service has its limitations and should not be seen as a solution to ‘guarantee’ creditors, because they destructively undermine the sustainability of the city or state.The global hunt for yield has probably chased new investors into the Muni market who may not fully understand that in recent years it has become an ‘ownership not rental’ market. In other words, it is unlikely holders of Munis can sell what they own, as liquidity in the secondary market is almost non-existent.
Via George Friedlander (Citi),
The Detroit bankruptcy filing is no surprise, given that its financial distress can be traced as far back as 1992, when Moody’s downgraded the City’s debt to junk. While ratings did bounce back to IG levels for brief periods, the City has essentially faced worsening budget deficits and liquidity challenges over the last decade.The Detroit Emergency Manager’s proposal for creditors was unprecedented, at least as far as municipals are concerned, as it essentially tried to flatten the debt priority structure by attempting to impose the same treatment for GO bonds as other forms of debt which are deemed unsecured, including pension obligations, OPEBs, leases and COPs.The Emergency Manager’s restructuring plan was unlikely to succeed via bilateral agreements and just on the face of it, the Chapter 9 filing could be viewed as mild positive for GO bond holders (especially unlimited GO bondholders) as now more control rests with the bankruptcy judge and standard Chapter 9 rules could apply.However, the Emergency Manager retains the exclusive rights to file an adjustment plan (unlike Chapter 11, there is no provision in Chapter 9 for creditors to end this exclusivity or propose a competing plan). Thus, the original restructuring plan could serve a baseline for the ultimate settlement and recovery process.It is still early in the process to predict recovery rates but the unlimited tax GO bond structure provides creditors with a stronger lien on the issuer’s resources and thus recovery rates on this class of debt could be somewhat higher vs. limited tax GOs and other forms of debt which are deemed unsecured.Again, it’s early in the process and there is no precedent for a large city with this level of financial distress.Detroit’s filing is an isolated case and its fiscal problems are not indicative of the broader municipal credit landscape, in our view. But, the outcome of the bankruptcy process will dictate whether the value of the full faith and credit pledge backing GO bonds will be diminished going forward.
http://www.zerohedge.com/news/2013-07-25/cyprus-deposits-plunge-fastest-rate-ever
Cyprus Deposits Plunge At Fastest Rate In History
With capital controls like these who needs bank runs.
Perhaps the most underreported news to come out of Europe this morning had nothing to do with PMI or employment or credit creation in the Eurozone. It had to do with Cyprus - the insolvent island that everyone forgot - and which since its March bail in has been left for a state of Schrodingerian suspended animation, where it is either alive or dead depending on what propaganda wave function it had to satisfy.
Recall that many, most certainly us, said that the imposed capital controls would have no impact in stemming the massive outflow of what money is left with the insolvent banking system, and very soon the entire banking system would remain deposit, and thus funding, free requiring more and bigger bailouts. Sure enough, this was just confirmed when the Central Bank of Cyprus reported that not only did local deposits drop to a level not seen since 2007, plunging by the second fastest absolute amount in history, but declined at the fastest rate ever!
And if the current outflow is not stemmed, there won't be a single Euro (Cypriot Euro, not European Euro) in deposits left in under one year.
Total Cyprus Bank Deposits:
Monthly Change in Deposits:
And rate of deposit change - biggest drop ever.
Luckily, the central bank provided an explanation for this unprecedented. Apparently it is simply due to the not all too clear shenanigans involved with the failure of its banks, and the reclassification of various liabilities when one bank simply folded:
First - its explanation for the historic May deposit crash:
May 2013: The data for the reference month of April 2013 reflect the provisions of the “Bailing-in of Bank of Cyprus Public Company Limited Decree of 2013”.Specifically, 37,5% of unsecured deposits were converted into equity, while a further 22,5% and 30% of unsecured deposits were temporarily blocked but remain under deposits. On the other hand, the data for April 2013 do not yet reflect the provisions of the “Sale of Certain Operations of Cyprus Popular Bank Public Co Ltd Decree of 2013, which was implemented on the 19th of May.
Handy information, and quantified too. But then the explanation for the second drawdown leaves many more open questions, as there is no quantification of the shift.
July 2013: The data for loans and deposits for June 2013 reflect the provisions of the “Sale of Certain Operations of Cyprus Popular Bank Public Co Ltd Decree of 2013”. As from June 2013 Cyprus Popular Bank Public Co Ltd is not considered a Monetary Financial Institution for statistical purposes and therefore, its remaining balances (which were not transferred to Bank of Cyprus Public Company Ltd) are excluded from the outstanding amounts. However, according to the statistical guidelines of the European Central Bank this should not be considered a financial transaction and therefore an adjustment to remove its impact is included under “reclassifications adjustments” with a negative sign. For details please refer to part 4, “Technical Notes”.
We are confident the CBC will have many more such "technical notes" explaining why deposits continue to collapse in the coming months.
The good news for all other insolvent European peripheral countries is that the local depositor base is absolutely convinced that what happened in Cyprus is a one-time, non-blueprint event and have zero reservations about keeping their own deposits in place with the local banks, where they are perfectly safe and sound.
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