http://www.zerohedge.com/news/2013-07-28/europe-passes-inflection-point-or-why-ltro3-inevitable
Submitted by Tyler Durden on 07/28/2013 18:05 -0400
Submitted by Tyler Durden on 07/28/2013 14:30 -0400
Submitted by Tyler Durden on 07/28/2013 20:01 -0400
Europe Passes The Inflection Point (Or Why LTRO3 Is Inevitable)
One year on from the "whatever it takes" speech and all appearances suggest Draghi's all-in move with the imaginary OMT 'worked. European sovereign spreads have compressed dramatically, European stock indices are near their highs, European financials are doing great. Of course, record unemployment rates, record loan delinquencies, record drops in house prices, and record deposit outflows can all be ignored because no matter what, Draghi will do "whatever it takes." Except, as JPMorgan notes, the excess cash in the Euro area banking system continues to decline reaching EUR230bn, closer to the so-calledinflection point at which money market rates, i.e. EONIA and repo rates, are responding more pronouncedly to changes in the excess cash. Bank funding is becoming increasingly volatile since the 2nd LTRO repayment and the trend shows no sign of abating. We suggest Mrs. Merkel will be on the phone telling Mr. Draghi to "get back to work," - at least until September 23rd anyway.
Via JPMorgan,
Approaching the inflection point in Euro area money marketsThe excess cash in the Euro area banking system continues to decline reaching €230bn, closer to the so called inflection point at which money market rates, i.e. EONIA and repo rates, are responding more pronouncedly to changes in the excess cash.How have EONIA and repo rates behaved so far? Figure 3 shows the evolution of EONIA and Eurex repo market rates. EONIA reflects the rate at which banks lend to each overnight on unsecured basis. The Eurex repo market rate represents an effective interest rate in the secured interbank money market, computed as a volume-weighted average rate of all EUR overnight transactions in the ECB basket of the Eurex Repo GC Pooling market.What Figure 3 shows is that since the second LTRO repayment at the end of February repo rates have started rising and becoming more volatile. In contrast EONIA rates have been relatively more stable.In our opinion, the rise in repo rates and repo rate volatility after the second LTRO repayment suggests that Euro area money markets have already crossed the inflection point. Why are EONIA rates relatively more stable then? This has to do with the nature of EONIA. By reflecting unsecured interbank borrowing, EONIA rates capture only a small part of money market activity, which is dominated by core banks lending to each other, typically German and Dutch banks. Most of the activity in Euro money markets is secured, i.e. repos, and as such repo markets are a better reflection of money market conditions capturing a more diverse universe of counterparties including both core and peripheral banks.Repo market volatility could be transmitted to EONIA rates if money market activity migrates from secured to unsecured markets. This migration has started happening already over the past few weeks.Figure 4 shows that over the past four weeks volumes in EONIA have risen at the expense of repo market volumes, proxied by the traded volumes of overnight transactions in the ECB basket of the Eurex Repo GC Pooling market. As overnight repo rates approached unsecured EONIA rates at the end of June (Figure 3), certain market participants have started finding more attractive to raise overnight funding in unsecured markets transmitting volatility from repo to EONIA rates. This migration from secured to unsecured markets put upward pressure on EONIA rates in the month of July.
Put simply, as excess reserves diminish...
So there is a clearly increasing lack of trust in the interbank unsecured lending market. The inability of banks to fund themselves via this method leaves the system prone to systemic failure. Without another life-giving injection of ECB funding, this situation will only get worse... BUT there is simply not enough collateral to go around (even as the ECB slahes the quality guidelines on what crap it will accept on its balance sheet) and furthermore, banks' balance sheets will become even more encumbered by the ECB's iron fist and most-secured status should failure occur. Of course, bank stock-holders don't care that they are the ultimate first-loss in this game of cards, you BTFATH dummy!!
http://www.zerohedge.com/news/2013-07-28/china-kick-hornets-nest-non-performing-loans-audit-government-debt
China To Kick Bad Debt Hornets Nest
The last (and first) time China's National Audit Office conducted an audit of local government debt two years ago, in June 2011, it found that local governments and their various financing vehicles had taken on 10.7 trillion yuan of debt as at the end of 2010, which brought the issue of "underreported" high leverage in China to the fore. In the then words of Liu Jiayi, the country’s auditor-general, "some local government financing platforms’ management is irregular, and their profitability and ability to pay their debt is quite weak."
Others quickly chimed in: UBS estimated that local government debt could be 30 percent of gross domestic product and may generate around 2 to 3 trillion yuan of non-performing loans. Credit Suisse economist Tao Dong said it was the biggest "time bomb" for China’s economy. This was the most explicit warning about a credit bubble in China both internally and from "credible" outsiders (not fringe blogs and "conflicted" short-sellers) that had be uttered to date. It certainly wouldn't be the last as the recent aggressive attempts at deleveraging and reform in the financial system have shown.
Overnight, nearly two years after the first such audit, China announced it is conducting a follow up nationwide inquiry into government borrowings, "as the nation’s growth slowdown puts pressure on the new leadership to determine the extent of potential bad debts weighing down the economy."
So why now? Bloomberg has some suggestions:
The State Council, under Premier Li Keqiang, requested the National Audit Office to conduct a review, according to today’s statementfrom the audit office’s website, without providing any more details. The first audit of local government debt found liabilities of 10.7 trillion yuan ($1.8 trillion) at the end of 2010, the National Audit Office said in June 2011.Local-government financing vehicles need to repay a record amount of debt this year, prompting Moody’s Investors Service to warn Premier Li may set an example by allowing China’s first onshore bond default. Local governments set up more than 10,000 LGFVs to fund the construction of roads, sewage plants and subways after they were barred from directly issuing bonds under a 1994 budget law. A 4-trillion-yuan stimulus plan during the 2008-09 financial crisis swelled loans to companies, which they have been rolling over or refinancing with new note sales.LGFVs may hold more than 20 trillion yuan of debt, former Finance Minister Xiang Huaicheng said in April. That’s almost double the figure given by the National Audit Office in 2011. Refinancing will be a challenge after corporate bond sales slumped to a two-year low in the second quarter and policy makers cracked down on shadow banking activities that bypass regulatory limits on lending.
In other words, China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is).
Of course, now that China has set off on a reform path of active deleveraging, the "disclosures" about the true state of the world's biggest housing bubble (one that makes even Bernanke green with envy) are about to start coming fast and furious. And since LGFV debt is just one small part of the Chinese debt bubble and accounts for a tiny fraction of total consolidated Debt/GDP (recall that just Chinese corporate debt is the largest relative to the nation's GDP anywhere in the world), another theme we have covered extensively in the past,most recently here, one can only wonder what other "discoveries" lie in store.
For a few suggestions of what else may be uncovered soon, here are some excerpts from Morgan Stanley's recent report "China Deleveraging: A Bumpy Ride Ahead":
In the aftermath of the global financial crisis, monetary rather than fiscal policy likely played a bigger role in boosting domestic demand in China. This can be seen by the rise in bank credit to GDP.China’s total outstanding bank credit picked up from 102% of GDP in December 2008 to 133% of GDP in June 2013, thereby boosting domestic demand. Indeed, total outstanding bank credit has increased by US$7.2 trillion over December 2008 to June 2013 (Exhibit 9). Also, the non-loan sources of credit such as wealth management products, trust loans and bonds (total social financing) increased by US$3 trillion over the same period. Though policy makers’ stimulus was targeted at both investment and discretionary consumption by households, a large part of this funding was channeled into investment, with 70% of the loans going towards the corporate sector over this period.China’s incremental GDP return from leverage has been declining...Credit-Driven Growth Has Reached Its LimitsSigns abound that the strategy of pursuing growth via credit has reached its limits. Indeed, policy makers are getting concerned about financial stability risks and the misallocation of capital. Some of the key indicators, raising questions about the sustainability of the current trend, are as follows:#1: Weakening productivity of incremental creditThe asset quality issue in the banking system is the other side of the coin to the loss in capital productivity that we described earlier. Following the 2008 global financial crisis, there was only a brief period of four quarters in 2011 when nominal GDP growth outpaced credit growth. However, in the past six quarters, loan growth has again been outpacing nominal GDP growth. As of June 2013, nominal GDP growth was 8.0% compared with credit growth of 15.1% YoY (Exhibit 16).This is a reflection of the weakening productivity of incremental credit in our view. If one instead uses social financing (the broadest possible measure of credit) as the gauge, the divergence with nominal growth is even more concerning. In light of current trends, we believe any attempt to push the overall investment growth engine further will only increase the risk of a deeper and prolonged shock later on as it exacerbates the problem of excess capacity, and the continued buildup of leverage and weak profitability growth weighs further on corporate balance sheets.#2 Interest rates higher than nominal output growth of secondary sectorThe nominal benchmark 1-year lending rate at 6% and producer price inflation at -2.7% imply a real borrowing cost of 8.7% for the corporate sector. However, the true cost of borrowing for the corporate sector is likely higher, given that the weighted average lending rate in the banking system was 6.7% in March 2013 and non-banking borrowing would come at an even higher cost. In comparison, real growth in secondary sector output stands at 7.6%YoY in June 2013 (Exhibit 17).While CPI is typically used to compute real rates, we have used PPI in China because the bulk of the leverage buildup has been predominantly due to corporates and not households. In any case, the conclusion remains unchanged even if we were to compare nominal interest rates with nominal output growth of the secondary sector (Exhibit 18).The latter now is 5.1%, lower than nominal corporate borrowing costs.A higher interest rate relative to the underlying income growth means that debt is compounding at a much faster pace than underlying income growth and the debt trajectory ultimately becomes unsustainable. This challenge has emerged because nominal GDP growth has decelerated significantly in the last few quarters. On the other hand, policy makers have been hesitant to cut rates owing to concerns about sending the wrong signals to entities that have overinvested. The current real interest rate environment will likely exacerbate the asset quality issues in the banking system. Indeed, historical episodes of risk aversion in the financial system in both the US and Japan have also taken place when real rates exceeded real GDP growth.
And so we get to the point where one more country has reached the end of the can-kicking road, and is about to kick the only remaining thing it can instead: the hornets nest of a truly epic debt bubble.
http://www.zerohedge.com/node/476936
"The Taper Is Coming" - What Wall Street Thinks
Back in May, when we coined the term "Taper Tantrum" before the infamous Hilsenrath articlewas released bringing with it famine, pestilence and a full rerun of the 1994 blow out in yieldsand when the prevailing consensus was that Bernanke wouldn't touch the rate of monthly monetization until December or even 2014, we forecast that as a result of a the declining US deficit (primarily due to a brief spike in GSE remittances to the Treasury until the closed loop of lower monetization ends any myth of a "housing recovery" and pushes US deficits wider again) Bernanke will have no choice but to taper QE by $20 billion (or else risk destabilizing an already illiquid TSY market even more) with the announcement due at the September FOMC meeting. Just to avoid any confusion, we also showed just what such a September tapering would look like in the grand context of QE.
But when, and by how, much does Wall Street see the end of tapering, and what is the sell-side consensus? The list below summarizes the current view by bank.
- Goldman - Sept taper, - $20b in Tsys
- JPMorgan - Sept taper
- Credit Susse - Sept taper, -$20b via -$10b MBS and -$10b Tsys
- BNP - Dec taper w Sept'14 ending; - $10b ea Tsys/MBS; poss less MBS/more UST's
- Barclays - Sept taper of - $10b Tsys/- $5b MBS, end buys in Mar'14
- Bank of America - Dec taper but 'sizable chance' of Sept
- Deutsche Bank - Sept taper, risk of Dec
- Pierpont- Sept taper;
- BMO - Sept taper;
- RBC - Sept taper likely
- Citi- Sept announce, start taper with Oct 1 buys to $60-65b, stop in mid'14
- ING - Sept taper in Tsys;
- BTM-UFJ - Sept taper
- ScotiaBank - Dec taper
- Jefferies - Oct announce taper, go to smaller buys in Nov
- Nomura - Sept announce taper, begin taper in Q4
- Cantor Fitzgerald -first taper in Sept, of Tsys -$10B and MBS -$5B
Consensus: September tapering start with ~$20 billion in initial reduction. As we said over two months ago.
Source: MNI
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