Thursday, January 23, 2014

Emerging market volatility January 23 - 24 , 2014 - focus on Argentina's looming default chaos and currency " troubles " .... Turkey and Ukraine face different types of political crisis , however , the Turkish lira has been buffeted recently and Ukraine also facing currency impacts in addition to real economy impacts..... China has financial sphere issues threatening to become too big to control without blowback ..... Venezuela faces shortages of paper products , food products , a currency hyperinflation if one looks at their black market.......


CME Hikes Turkish Lira, Nat Gas Margins

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Once upon a time, the only CME margin hike releases the investing population cared about were those for gold (because no matter how high the E-Mini went, the CME never seemed too bothered). Now, the CME has more "important" things to worry about - such as preventing the "heating bill shock" that will come in February when the majority of the population opens their electricity and heating statements for January (sorry, there goes the discretionary retail spending cash). And of course, the ongoing deterioration of the emerging markets, in this case led by Turkey and the absolute collapse in the Turkish Lira. Which is why about an hour ago, the CME decided to hike both TRY (to both the USD and EUR) and Nat Gas margins, by 14 and 20% respectively. Will this normalize some of the vol seen around these products on Monday remains to be seen. Oh well, if not - the CME can just hike some more the same day, until it gets the desired outcome.

Emerging Market CDS Blow Out

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The last time markets scrambled for protection against sovereign defaults was over European country collapse in the summer of 2012 around the time Mario Draghi introduced a non-existent measure to allow Europe's nations to engage in zero reforms while their bond yields plunged. This time it is the emerging markets.
  • Argentina +139bps at 2562.07bps, hit highest since Sept.
  • Venezuela +81bps at 1398.19bps, highest since 2010
  • Turkey +11.6bps at 276.7bps, highest since June 2012
  • South Africa +10bps at 236bps, highest since Sept.
Of course, CDS aren't telling us anything (capital-controlled) FX hasn't already made quite clear.
Source: BBG

Risk Off: Yen Soars, Equity Futures Tumble As EM Revulsion Escalates

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It's Risk Off time.
It all started early in the session when China’s banking regulator ordered regional offices to increase scrutiny of credit risks in coal-mining industry, signaling not only government concern about possible defaults but the implication that possible defaults especially in the much-discussed Trust product which may default as soon as a week from today. This caused a hiccup in the USDJPY which until that point was being pushed higher by Japanese banks hoping to reverse recent losses by adding to their losing long positions.  But then things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, driven by unfavourable interest rate differential flows amid heightened concerns over EM nations, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%. 
And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?
More details from RanSquawk
Heading into the North American open, stocks in Europe are seen lower across the board, as concerns over EM markets continued to weigh heavily on investor sentiment. As a result, Argentina exposed BBVA shares fell 4% after Argentinian central bank devalued the ARS the most in 12 years as the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low, which in turn saw the Spanish IBEX-35 underperform its peers.
Negative sentiment, together with touted month-end related flows has supported flows into fixed income assets, with UK Gilts also better bid in spite of the bear steepening of the short-sterling curve in reaction to press reports by FT which wrote that Carney has signalled scrapping of forward guidance target. This in turn ensured that despite the flight to quality, with GBP initially outperformed its peers, however, a retracement of these gains amid a stronger EUR following higher than expected LTRO repayment has seen GBP/USD trade lower.
Asian Headlines
Touted profit taking ahead of the Chinese New Year, together with renewed concerns over EM markets and consequent short-covering of positions saw the JPY swap curve aggressively bull flatten overnight. While JGBs are expected to be supported next week by BoJ conducting JGB purchasing ops, comments by the President of the GPIF, who said that the fund will not buy more Japanese government bonds and that there is limited room for JGB prices to increase may weigh on sentiment. (BBG)
BoJ's Kuroda says Japanese economy is on track; after sales tax hike and economy will continue to grow around 1.5%. (RTRS)


We conclude with Jim Reid's usual overnight recap
The jury is still out on whether yesterday’s selloff was caused by the US data, poor corporate earnings or the Chinese PMI. Whatever the reason, the real damage was in done in EM where the rumblings from Turkey, Argentina and Venezuela cumulated in another very weak day for EM sovereigns. Even with the fall in the USD and rally in UST yields (-9bp to 2.78%), there was little to cheer in EM sovereign credit as the dual worries of inflation and potential BoP issues provided a common thread yesterday. All this provides a fairly nervous lead-in to next week’s FOMC where the consensus appears to be that another $10bn in tapering will result.
To put yesterday’s EM performance in perspective, the CDX EM and JPM EMBI credit indices widened by more than 15bp apiece in the worst one-day performance since the turbulent summer of 2013. Starting with Argentina, the peso suffered its biggest one-day fall in more than a decade (-13%) after the country’s central bank decided to pull its support for the currency in order to preserve its FX reserves which had fallen by almost a third over the past year.
Our EM strategists point out that unfortunately neither the Central Bank nor Treasury is doing much to contain the pass-through to inflation by tightening policy. Thus, more volatility is almost guaranteed in the short term and the stability will only be established once the peso is weak enough – probably at a level one Peso or two away from yesterday’s closing. In Turkey, the Central Bank intervened directly in the FX market yesterday for the first time in just over two years, by selling USD3bn in support of the lira. Our EM team’s bottom line here is that the CBT does not have enough reserves to credibly mount a sustained defense of the lira by selling FX. Net reserves do not fully cover short-term external debt and provides only about two months of import cover, and are also not enough to cover the risk-weighted measure of potential drains on reserves developed by the IMF. In Brazil, the lower than expected IBGE inflation reading (0.67% M/M vs 0.79% consensus) was a welcome development, but this didn’t stop the IBOVESPA from losing 2% while Brazil CDS and bond yields closed about 5bp higher on the day.
Turning to the Asia, equity markets are experiencing another pullback today as worries in EM weigh on risk sentiment across the region. The Nikkei is trading 2.2% lower as it drifts further away from the 16,000 mark and as yesterday’s 1.2% drop in dollar-yen drags on Japanese exporters. Chinese A-shares are the only major market trading in positive territory today (Shanghai Comp +0.8%) but it appears to be driven by one or two sectors – namely tech stocks – after it was reported that PC giant Lenovo (+2.25%) may acquire IBM’s low-end server business. A sharp fall in Chinese money market rates is also providing a tailwind for Chinese equities. Overnight it was reported that China’s banking regulator had issued an alert on credit risks in the country’s coal sector (Bloomberg). This comes after Chinese bank ICBC’s chairman reiterated yesterday that it won’t be bailing out investors in a troubled $500m wealth management product that matures in one week’s time. In Asian sovereign credit, the spreads on higher beta names such as Indonesia (+8bp) and the Philippines (+5bp) are being marked wider while the benchmark Asia IG index is 5bp higher.
Taking a brief look at the data flow yesterday, the selloff appeared to gather momentum with the release of some uninspiring US data. December existing home sales (4.87M vs 4.93M) were modestly below expectations, but the details of the report suggests weather may have impacted sales in the month. Indeed, weakness was concentrated in two regions of country particularly prone to adverse winter weather, namely the Northeast (-1.5% vs. -3.0%) and the Midwest (-4.3% vs. -4.9%), while the South (+3.0% vs. -4.4%) and the West (+4.8% vs. -11.1%) both registered modest gains. Our US economists point out that since last July, existing home sales have declined -9.7% - the lack of supply on the market being one of the reasons for the decline. The US Markit PMI fell to 53.7, well below the 55.0 Bloomberg consensus estimate. Initial jobless claims for the week of January 18 increased +1k to 326k after the prior week was revised down -1k to 325k. This leaves our economists calling for +200k for January’s payrolls. Euro-zone flash PMIs increased by 1.1 to 53.2 (vs 52.4 expected), the highest reading since June 2011, which provided a brief reason for markets to rally. The stronger Euro PMI was led by firm manufacturing readings in France (48.8 vs 47.5 expected) and Germany (56.3vs 54.6 expected). On the earnings front, there was disappointment with Lockheed Martin’s (-3.93%) earnings despite a strong earnings beat and management predicting that US defence spending will be soon bottoming out.
Starbucks was also cause for worry after Dec quarter same store sales growth rose 5%, which was less than the consensus estimate of 5.9%. In other headlines, the BoE’s Mark Carney gave a series of television interviews yesterday on the sidelines of the World Economic Forum downplaying the idea of rate rises were around the corner given the fall in the jobless rate to 7.1%. Carney joined his BoE colleagues McCafferty and Fisher in saying that the 7% threshold was merely a marker to then "begin to think about" raising rates. The FT was more forthcoming in its interpretation, saying that Carney was potentially signaling that he was scrapping forward guidance as he was against “unnecessarily focusing on one indicator”. We may get more detail on Carney’s thoughts later today when he speaks at the WEF in Davos.
Turning to the day ahead, the week draws to a close with very little on both the earnings and data calendar. Mark Carney will be speaking today at the World Economic Forum at around midday London time. The WEF annual meeting concludes tomorrow. Canada provides an update on December inflation and there will be some focus on the current account numbers from Brazil.


H/Ts  Harvey Organ , Bloomberg and Zero Hedge ....

The big news today is the huge problems facing Argentina as they may head into another default:

(courtesy Bloomberg)

Argentine Default Chaos Relived as Blackouts Follow Looting

It was all of them combined.
At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches -- just enough to sell soda to passersby on a sweltering summer day.
Thirteen years after that collapse, President Cristina Fernandez de Kirchner is running out of time to avert another crisis. The policy mix that Fernandez and her late husband and predecessor, Nestor Kirchner, used to usher in 7 percent average annual growth over the past decade -- higher government spending financed by printing money -- is unraveling.

Inflation soared to 28 percent last year, according to opposition lawmaker Patricia Bullrich, who divulges monthly estimates for economists cowed into silence by Fernandez’s crackdown on price reports that clash with official figures. By the government’s count, inflation was less than 11 percent.

Peso Tumble

The peso plunged 17.5 percent to a record low of 8.1842 per dollar today, extending its decline to more than 35 percent over the past year, as the central bank scaled back efforts to prop it up. The selloff is the worst since the devaluation that followed the default. Currencies from only two countries in the world have fallen more: war-torn Syria and Iran.
Power outages like the one that sunk Kanaza’s shop into darkness are becoming more frequent, deepening the economic slump, after the nation’s grid atrophied under a decade of government-set electricity price controls. The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations.
Fernandez’s biggest financial problem is the loss of foreign reserves. They’ve tumbled 44 percent in the past three years to $29.5 billion as prices on the country’s soy and wheat exports slumped and Argentines circumvented currency controls created to keep dollars onshore. The government sought to stiffen those restrictions again yesterday, limiting people to two online purchases a year from overseas providers.

Default Concern

For a country that remains locked out of international debt markets as it haggles with billionaire hedge fund manager Paul Singer over lawsuits stemming from the default, the reserves are its main source of dollars to pay holders of $30 billion of bonds who accepted restructuring terms. When other foreign-currency obligations are included, the amount owed swells to $50 billion.
Investors are bracing for the possibility of another default. The country’s average dollar bond yield of 12.4 percent is the highest among major developing nations after Venezuela. Trading in swap contracts that insure bonds shows investors see a 79 percent probability of a halt in payments over the next five years, a reflection in part of concern that Singer’s demand of full repayment on the securities he kept from the 2001 default will disrupt debt servicing.

New Cabinet

“We’re seeing some sort of day of reckoning,” said Diego Ferro, co-chief investment officer in New York at Greylock Capital Management, which has been investing in the country’s debt since the 1990s. “The adjustment will have to happen if Argentina doesn’t want to hit a wall before 2015.”
Fernandez, 60, has overhauled her cabinet and reworked some policies in a bid to stem the capital flight. In her first day back on the job in November following surgery to remove a blood clot near her brain, she replaced the economy minister, cabinet chief, agriculture minister and central bank president. A day later, Guillermo Moreno, the trade secretary who played the strongman enforcing price controls, was gone.
The new cabinet pledged to work with the IMF to improve data, began talks to settle $6.5 billion of overdue debt with Paris Club creditor nations and unveiled plans to compensate Spain’s Repsol SA for the seizure of its local oil unit in 2012. Bonds advanced, driving yields on the country’s benchmark securities to a one-year low of 11.07 percent on Nov. 29.

Patagonia Getaway

Ferro doubts the measures are enough. Bolder steps, such as reaching a deal with Singer to regain access to overseas markets and lifting currency controls, are needed to regain investor confidence, he said. The bond rally began to falter in early December. By mid-month, all the gains had been erased.
An Economy Ministry spokeswoman didn’t return telephone calls seeking comment on the government’s financing plans.
Fernandez is giving no indication of what her next move is. After re-appearing following the five-week absence for surgery, she vanished again, spending much of December holed up in her 5,600-square-foot (520 square meters) brick villa in Patagonia. She went another five weeks out of public view before popping up at the presidential palace last night to unveil a new student aid program.
And that’s perhaps what angers Argentines like Miguel Llanes the most. While the looting spread across the country from Cordoba and the blackouts dragged on day after day in the capital city, Fernandez was nowhere to be seen. Llanes, unable to open his curtain shop in downtown Buenos Aires for over a week, vented by joining protesters who were burning tires and garbage in the streets.
“Where was the president?” he shouts.
And then he raises a question that holders of $50 billion of Argentine bonds are dying to know.
“How long will this last? They’ve spent all the money.”

Argentinian foreign reserves fall another 80 million, down to 29,4 billion usa.
Its currency collapsed to 12.75 to the dollar on the black market and this nation is experiencing a massive bank run.

(courtesy zero hedge)

Your Front Row Seat To Argentina's (Latest) Currency Collapse

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UPDATE: The Argentine Trade Balance missed surplus expectations by the most in 3 years (and 2nd most on record).

As those who follow Zero Hedge on twitter know, we have recently shown a keen interest in the collapse of the Argentine currency reserves - most recently at $29.4 billion - which have been declining at a steady pace of $100 million per day over the past week, as the central bank desperately struggles to keep its currency stable. Actually, make that struggled
As of today it is not just the collapse in the Latin American country's reserves, but its entire currency, when this morning we woke to learn that the Argentina Peso (with the accurate identifier ARS), had its biggest one day collapse since the 2002 financial crisis, after the central bank stopped intervening in currency markets. The reason: precisely to offset the countdown we had started several days back, namely "an effort to preserve foreign exchange reserves that have fallen by almost a third over the last year" as FT reported.
As the chart below shows, the official exchange rate cratered by over 17% when the USDARS soared from 6.8 to somewhere north of 8.
But as most readers know, just like in Venezuela, where the official exchange rate is anywhere between 6.40 and 11, and theunofficial is 78.85, so in Argentina the real transactions occur on the black market, where they track the so-called Dolar Blue, which as of this writing just hit an all time high of 12.90 and rising fast.
What happens next? Nothing good. "The risk of capital flight is rising by the minute. This will be very hard to control,” wrote Dirk Willer, strategist at Citigroup, adding that liquidity had "largely disappeared" with a risk of Venezuela-style capital controls. Ah Venezuela - that socialist paradise with a soaring stock market... even if food or toilet paper are about to become a thing of the past.
Some other perspectives via the FT:
Siobhan Morden of Jeffries said: “This is not an administration that respects or understands market pressure. They have been in the early stages of currency crisis since December, and yet their main strategy has been to pay off arrears and try to attract foreign direct investment.”

Luis Secco, Buenos Aires economist, said "It is hard to figure out what is the logic behind the authourities decision to let the peso so abruptly, without any other accompanying macroeconomic policy. It’s possible that the authorities would rather see a strong rise in the dollar, than lose, again, a large quantity of reserves."

It is a potentially dangerous situation...not least because it could give the impression that the authorities don’t have a very clear idea of how to manage the situation.”

Ricardo Delgado, Buenos Aires economist, said on Wednesday: “The government faces a dilemma. It wants to stop reserves from falling. But that means less imports and thus lower growth, as the economy is very dependent on imports. So the question is: do you want more growth, or higher foreign reserves.“
However, with the "currency run" having once again begun, absent a wholesale bailout and/or backstop by "solvent" central banks of Argentina, a country which has hardly been on good speaking terms with the western central banks, there is little that the nation can do.
So for all those morbidly curious individuals who are curious what the slow-motion train wrecked death of yet another currency will look like, below is a link to the DolarBlue website, aka the front row seats where the true level of the Argentina currency can be seen in real time. If and when this number takes off parabolically, that's when the panic really begins - first in Argentina, then elsewhere.

Of course, it's not just Argentina - most of the world's emerging market FX is getting hammered year-to-date...

This Is What A Central Bank Losing Control Looks Like

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With chatter that over $3 billion has been thrown into the FX market to buy Turkish Lira, it appears the central bank is losing control quickly and Turkish stocks are tumbling. The Turkish Lira collapse almost 400 pips this morning to around 2.30 to the USD - an all-time record low as the combination of corruption, social unrest, and Fed taper are seeing hot money outflows faster than the Turkish Central bank can keep control. This is the biggest tumble in the Lira in almost 5 months as the Istanbul 100 (stocks) drops 2.9% - its biggest drop in a month; and Turkish bond yields are backing up to 2-year highs.

Green arrows show central bank efforts to control the chaos...

Ukraine to Interrupt Parliament Break After Deadly Riots

Ukraine will recall lawmakers from their winter break for an emergency session after weeks of anti-government protests in the capital claimed their first lives.
Parliament, which defeated a no-confidence motion against the cabinet in December, will convene early next week to try to resolve the crisis, according to a statement on President Viktor Yanukovych’s website. He’ll hold talks today in Kiev with opposition leaders who yesterday gave him 24 hours to call early elections and annul a package of anti-protest laws.
Yanukovych is struggling to stem rallies against his November snub of a European Union cooperation deal, with police crackdowns fanning people’s anger. Four days and nights of clashes left as many as five people dead and about 2,000 injured as legislation to stem the protests took effect at midnight yesterday and the government gave the police special powers to quell the demonstrations.
“We don’t think the president is ready for snap elections,” Serhiy Yahnych and Yevgeniy Orudzhev, analysts at BNP Paribas SA’s Ukrsibbank unit in Kiev, said today in an e-mailed note. “The political situation may remain fragile over the next days or weeks as no easy outcome is seen.”
The cost to protect Ukrainian debt against non-payment using five-year credit-default swaps jumped to 825 basis points, the highest since Dec. 16, data compiled by Bloomberg show. The yield ongovernment bonds due 2023 rose for a fourth day, surging 32 basis points to 9.298 percent at 6:40 p.m. in Kiev.

Parliamentary ‘Platform’

The extraordinary parliament session should be a “platform” to discuss the opposition’s demands, according to today’s statement. A meeting between opposition leaders including ex-heavyweight boxing champion Vitali Klitschko was due to start at 5:30 p.m. after several delays.
Prime Minister Mykola Azarov didn’t show any willingness to compromise.
“It’s absolutely impossible to hold snap presidential elections now,” he said today in Davos, Switzerland, according to comments posted on the government website. “How one can speak about elections when the center of Kiev is occupied by gunmen? A coup attempt is in progress.”
More than three hours of negotiations yesterday left the opposition frustrated. Yanukovych didn’t answer the demand for a snap election, Klitschko, who heads the UDAR party, told a rally yesterday evening, where the RBC news service estimated turnout at more then 50,000 people.

Gunshot Wounds

Two bodies with gunshot wounds were found yesterday at a medical point set up by activists, though police said it’s unclear whether the wounds resulted from live rounds or rubber bullets. One of the deceased was a 21-year-old Armenian with Ukrainian citizenship, prosecutors said. The other was from Belarus, Radio Liberty reported.
Reports that a 22-year-old died in hospital after being beaten and falling are being probed, the Interior Ministry said yesterday. The opposition says five people have died, with more than 1,700 injured. Nearly 200 policemen have sought medical help, according to the Interior Ministry.
Protesters reinforced barricades around Independence Square overnight and continued to set tires on fire to create black smoke in front of a riot police line on the street leading to parliament. Groups of activists, many of them elderly women, were breaking stones out of the pavement before noon, packing them into bags to strengthen barricades up to about 4 meters (13 feet) in height.

Spilled Blood

“Blood hasn’t been spilled for nothing,‘‘said Ihor Lavrinyuk, 27-year-old computer programmer who joined the protest yesterday and plans to volunteer as a computer specialist for activists. ‘‘There’s no way back and the government must go.’’
As protesters yesterday hurled projectiles including Molotov cocktails, police responded with batons, rubber bullets, smoke bombs and stun grenades. More than 70 people have been detained, the Interior Ministry said. They include several who sought medical help overnight, TV5 reported.
The U.S. said it would revoke the visas of persons linked to violence last year and the EU warned it was considering its course of actions in response. Russia warned the West against meddling in Ukraine’s affairs.
Russia is convinced Ukraine’s authorities ‘‘know perfectly well what to do” and “resents” the interference of Western governments, President Vladimir Putin’s spokesman, Dmitry Peskov, was cited as saying in an interview with the Komsomolskaya Pravda newspaper published today.

German Outrage

European leaders maintained their criticism.
German Chancellor Angela Merkel warned Ukraine to stem the violence and condemned last week’s anti-protest bill.
“We are very concerned -- and not only concerned, but outraged -- at the way in which these laws were pushed through and that call into question these fundamental freedoms,” Merkel told reporters today outside Berlin.
European Commission President Jose Barroso spoke with Yanukovych today by phone, urging him to “have the highest level of dialogue with the opposition immediately,” according to EU spokesman Olivier Bailly. He also reiterated to reporters in Brussels that the EU would “assess possible consequences in its ties with Ukraine” if the situation isn’t “stabilized.”
EU Enlargement Commissioner Stefan Fule will start a two-day visit to Kiev tomorrow to discuss the recent developments.
Ex-Soviet President Mikhail Gorbachev, a 1990 Nobel Peace Prize recipient, wrote to U.S. President Barack Obama and Putin to request they broker peaceful resolution to crisis in Ukraine, according to the Interfax news service.
“I ask you to find a way and take a decisive step to help Ukraine get back on the road to peaceful development,” Gorbachev wrote in a letter reported by Interfax.

Ukraine unrest slams currency, Russia's $15bn aid crucial to avert further collapse

Published time: January 22, 2014 17:25
Banknotes of Ukrainian hryvnia.(Reuters / Gleb Garanich)
Banknotes of Ukrainian hryvnia.(Reuters / Gleb Garanich)
Violence on Kiev’s streets has sent the hryvnia to an almost 4-year low, with bond yields jumping 3 percentage points. Ukraine’s future economy depends on whether Russia delivers the promised $15 billion aid on time and in full, Chris Weafer told RT.
Watch LIVE UPDATES on Ukraine’s protests here.
Since early December, the hryvnia has lost 3 percent, falling to 8.44 against the dollar. In the last 12 months the Ukrainian currency depreciated by 4 percent, with almost half of the decrease taking place in the past week, says the Financial Times.
Any further devaluation is hardly likely, as the Ukrainian government is determined to keep the hryvnia pegged to the US Dollar, Chris Weafer, senior partner at Moscow-based consulting firm, Macro Advisory, told RT in an emailed note.
“But it does depend on Russia actually sending all of the promised aid (so far $3 billion of the promised $15 billion has been delivered), and that will clearly depend on the government regaining political control,”he said.
The country’s bonds also weren’t left untouched. After the killing of three anti-government protesters was reported, the yield of Ukraine’s international dollar bond, expiring later this year, jumped by almost 3 percent points to 9.3 percent on Wednesday. The yields on the longer-term Ukraine bond - to mature in 2023 - have also risen by more than half a percentage point to 8.52 percent.
However, the plunge hasn’t been dramatic, especially when compared to what was happening late last year before Ukraine agreed on a $15 billion financial bailout from Russia, Weafer said.
“Here also the key issue is whether Russia will deliver the full $15 billion promised. If it does then there is no default risk and bond yields should remain relatively stable,” said Chris Weafer.
“If the political situation worsens and the government loses control then the Russia payments could be delayed until there is clarity and stability. In that case, the default risk would increase…. But, for now, investors assume the rescue deal will remain intact and default is not a risk,” the analyst concluded.



Is The China Bank Run Beginning? Farmers Co-Op Unable To Pay Depositors

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While most of the attention in the Chinese shadow banking system is focused on theCredit Equals Gold #1 Trust's default, as we first brought to investors' attention here, and the PBOC has thrown nearly CNY 400 billion at the market in the last few days, there appears to be a bigger problem brewing. As China's CNR reports, depositors in some of Yancheng City's largest farmers' co-operative mutual fund societies ("banks") have been unable to withdraw "hundreds of millions" in deposits in the last few weeks. "Everyone wants to borrow and no one wants to save," warned one 'salesperson', "and loan repayments are difficult to recover." There is "no money" and the doors are locked.
The locked doors of one farmers' co-op...

Shadow Banking has grown remarkably... recent years, opened dozens of Yancheng local "farmers mutual funds Society", these cooperatives approved the establishment by the competent local agriculture, and received by the local Civil Affairs Bureau issued a "certificate of registration of private non-enterprise units."
As savers are promised big returns...
Deposit-taking and lending by cooperatives operated operation, and to promise savers, depositors after maturity deposits not only can get the interest, you can also get bonuses.
But recently things have turned around...
However, beginning in early 2013, Yancheng City Pavilion Lakes regioncontinue to have a number of co-op money people to empty, many savers deposits can not be cashed, thus many people's lives into a corner.

Dong-farmers in Salt Lake Pavilion mutual funds club, a duty officer's office, told reporters, because many people take money, put out loans difficult to recover, leading to funding strand breaks.
Rough Google Translation:
Salesperson: ...the money has been slowly falling and in the end is difficult to ask for money, right? And now there is no money coming in, now people don't want to save money, and take all the money.

Reporter: But it's their money, they should be able to...

Salesperson: I know I should [given them money]; however, when the turn started, their is no money, we get cut off and lenders and borrowers took off...
One depositor blames the government (for false promises):
The bank has a deposit-taking his staff, he would say that he is a government action that has the government's official seal, to give you some interest, as well as the appropriate dividends, because we believe that the government, so we fully believe him , we put the money lost inside, who thought in November, Xi Chu who told us that something was wrong.
But don't worry - this should all be settled by 2016...
Yu Long Zhang: we put all of his certificates of deposit are received out. You are only responsible for the loan out of the money back to the people against. The people's money has been invested in other projects go, we have to be tracked to ensure no loss of capital assets, can dispose of his assets disposed of, can recover quickly come back.

Reporter: There is a specific timetable yet?

Yu Long Zhuang: 2014 cashing out the entire program.

Reporter: When did all of these things can be properly resolved?

Yu Long Zhuang: the latest is 2015, 2015, all settled.
So, for the Chinese, their bank deposits have suddenly become highly risky 2 year bonds...

China's First Default Is Coming: Here's What To Expect

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As we first reported one week ago, the first shadow default in Chinese history, the "Credit Equals Gold #1 Collective Trust Product" issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books.
Of course, in a world awash and supported by moral hazard, where tens of trillions in financial asset values are artificial and only exist due to the benevolence of a central banker, it would be all too easy to say that China - fearing an all too likely bank run on comparable shadow products (of where there a many) as a result - would just step in and bail it out. However, at least until today, China has maintained a hard line on the issue, indicating that as part of its deleveraging program it would risk a controlled default detonation, in order to realign China's credit conduits even though such default would symbolically coincide with the first day of the Chinese New Year.
In turn, virtually every sellside desk has issued notes and papers advising what this event would mean ("don't panic, here's a towel", and "all shall be well"), and is holding conference calls with clients to put their mind at ease in the increasingly likely scenario that there is indeed a historic "first" default for a country in which such events have previously been prohibited.
So with under 10 days to go, for anyone who is still confused about the role of trusts in China's financial system, a default's significance, the underlying causes, the implications for the broad economy, and what the possible outcomes of the CCT product default are, here is Goldman's Q&A on a potential Chinese trust default.
From Goldman Sachs: A Matter of Trust
Q. What has happened?
Local and international media (e.g. Caixin, Financial Times) have reported that a RMB 3bn three-year investment trust issued by China Credit Trust Company (CCT) is at risk of not making its principal repayment due investors on January 31 (which also happens to be the first day of the Chinese New Year). The trust assets were used to make a loan to a coal mine company for mine acquisition and related investments, but the company has still not received licenses related to two of five planned mines, and the owner of the company was reportedly arrested in 2012 for illegal deposit taking. It has been reported that ICBC referred the project to CCT, which structured the trust product as a “collective trust” rather than a “single trust” that typically is used by banks to securitize loans. The trust was sold through ICBC to approximately 700 private banking clients, and reports suggest that ICBC will not guarantee investors in the trust against losses. Our China banks team published detailed information on the trust structure, as well as shareholders and financials of the trust company (see “CCT trust product risk; potential scenarios imply slower trust/TSF growth”, January 20, 2014).
Q. What exactly is a Chinese “trust” and how is it structured?
A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.
As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.
A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.
Q. How do trusts fit within the “shadow banking” sector in China?
Trust assets total some RMB 10trn as of late 2013. Though small as a share of the total stock of credit in China (Exhibit 1), trust assets have been growing at an annual rate of over 50% in recent years. The net new credit extension from trusts approached RMB 2trn in 2013 based on estimates from our bank analysts, or more than one-tenth of broad credit flow (total social financing) for the year. (Please refer to the “CCT trust product risk” note cited above for further detail on trust asset growth and composition.)
Exhibit 1: Trusts still small as a share of total financing, but growing rapidly

Source: Goldman Sachs Global Investment Research.
Some clients have asked about comparisons between the Chinese trusts and the SIVs (structured investment vehicles, sometimes known as “conduits”) that were prominent in the US financial crisis. The SIVs were off-balance sheet vehicles generally funded with short-term commercial paper (“asset-backed commercial paper”) with a period of a few days to a few months. Initially, these SIVs invested in relatively low risk, short-term receivables, although over time exposures shifted towards more complex, longer-term structured products such as subprime mortgage-backed securities or collateralized debt obligations. As doubts about asset quality began to arise in 2007, market funding conditions for the SIVs quickly deteriorated, requiring sponsoring banks to provide liquidity support and ultimately consolidate these assets on the balance sheet, which exacerbated funding pressures as well as asset write-downs. Similarities to Chinese trusts include the linkages with banks, the off-balance sheet nature of the trusts (true for many WMPs also), and the maturity transformation aspect (though it should be noted this is less extreme in the case of trusts, where investors are often committed for a period of a year or more, than for most SIVs; even WMPs typically have commitments of 3-12 months). Important differences include the relatively simpler assets of Chinese trusts – often loans, as in the CCT example – and the fact that the Chinese banking system is funded domestically (many SIVs raised funding across borders).
Q. Why is the potential default of a trust important?
With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply, with consequent damage to growth.
From the perspective of policymakers, the default of a trust under the current circumstances might be seen as having less risk of contagion than some other “shadow banking” products. First, the trust is explicitly not guaranteed by either the trust company or the distributor. Second, the investor base of a trust is typically a relatively small group of wealthy/sophisticated investors (the minimum investment in the CCT trust mentioned above was RMB 3mn). This contrasts with broadly offered wealth management products, which have many more individual investors with less investment experience and more modest personal finances. Third, the particular circumstances of this trust (lending to an overcapacity sector, failure to obtain key business licenses, arrest of the borrowing company’s owner) might make it easier for authorities to portray as a special case. Put another way, if the authorities felt obliged to provide official support to this product, it is not clear under what circumstances they would be comfortable letting any trust or wealth management product default.
Q. What are the options for policymakers?
The fundamental issue for policymakers is how any losses would be distributed among 1) investors, 2) the trust company and/or distributing bank, 3) the government and government-related entities. Potential options include:
  1. Allowing the trust to default (investors take losses). As noted above, this would call into question the implicit guarantees perceived by some trust buyers, thereby increasing the risk that new trusts or other non-guaranteed products such as WMPs face more difficulty obtaining funds, leading to tighter overall credit conditions. On the positive side, it would encourage greater focus on the underlying credit quality and better risk pricing going forward.
  2. Trust company and/or distributing bank provide support (levered institutions take the principal and/or interest losses), making an implicit guarantee explicit. Although legally there are no guarantees of principal from either the trust company or ICBC, to the extent the trust company manager or the distributing bank were obligated by policymakers (or other reputational or legal considerations) to provide support, it could prompt loss recognition, or at the worst a need for capital raising or shrinkage of the balance sheet if losses are substantial. As such, the quality of the underlying assets and due diligence are key to determine whether and how much losses might be taken by these institutions. Investor demand for trusts might rise after such a demonstration of support, but the higher perceived liability on the part of financial institutions would presumably reduce their appetite for issuing such products in the future.
  3. Government-backed entity provides support (government takes losses). In this case, the short-term market reaction would presumably be relief, as refinancing risks would be reduced and both banks and trusts would be off the hook. However, moral hazard for both issuers and investors would be increased, raising the risk of credit problems further down the road. Policymakers might try to minimize this moral hazard by providing support indirectly (via some government-supported entity or third party, rather than publicly and directly) and/or by providing only partial support. An example of the former occurred last year, when an “unnamed party”, possibly the local government which provided some land collateral and guarantees to the trust loans, intervened to purchase the defaulted loans of a steel plate manufacturer, enabling the investors in a CITIC WMP to be repaid fully (see “Latest China bailout reveals risk of local government’s hidden debts”, Reuters, May 7 2013).
Some mix of these options is of course possible, if the financial institutions or government provides partial support. Most observers seem to expect at least a partial bailout of the investors, reflecting a compromise between concerns about moral hazard and concerns about contagion. Unless there is a total bailout explicitly funded by the government, credit conditions in the trust sector seem likely to tighten at least modestly. Some central government level policymakers could be open to seeing a default, as it would encourage more careful risk assessment and help to contain credit growth going forward. However, other central government and many local government policymakers might be more inclined to contain the problem. Local officials in particular may feel more pressure to support key local enterprises that are major employers and taxpayers; in the current case, officials could in theory take actions such as granting mining licenses to make the trust assets more valuable.
Q. What should investors watch to track the broader market impact?
Besides the immediate news on what approach officials take in the case of the CCT trust, investors can watch other financial metrics for signs of stress. As always, interbank rates are useful as an indicator of the marginal cost of bank funding. Spreads to yields on nonbank products may reflect their perceived risk, although they could also be affected by other factors such as tight overall liquidity conditions. While we do not have high frequency data on trust yields, WMP yields have moved higher of late. Finally, data on credit volumes will be important to watch. To the extent conditions tighten, this should become visible in monthly total social financing flows (the trust portion in particular).
Q. What is the potential impact on economic growth and markets?
The growth impact of a trust default is highly uncertain, as it represents the product of two unknowns. The first unknown is the change in overall credit extension which would result from the default, and the second unknown is the sensitivity of economic growth to new credit. In work last year on the relationship between credit and growth (“The ‘credit impulse’ to Chinese growth”, April 11, 2013), we estimated a RMB 300bn change in the average monthly credit flow would have an impact of 80bp on sequential annualized real GDP growth in the following quarter (with further, gradually fading effects in subsequent quarters if the lower credit flow persisted). This is not far from the average monthly flow of trust loans in 2013 implied by our bank analysts’ estimates. So with our assumption on credit sensitivity, a hypothetical sharp tightening in funding conditions that stifled this flow of new credit (not affecting existing trusts) would imply an 80bp hit to sequential (annualized) growth the following quarter, and roughly a 50bp hit to yoy growth over the following year. Intuitively, the modest estimated impact stems from the small size of the trust sector in the overall financial system. We emphasize the very high degree of uncertainty in these calculations—this is a back-of-the-envelope illustration rather than a forecast. On the side of a smaller effect, officials could take steps to reduce the impact on trust lending or other lending channels could pick up the slack; on the side of a bigger impact, spillovers could occur to non-trust lending or to the real economy via effects on business or consumer confidence.
In the credit markets, more willingness to allow losses should lead to greater differentiation between stronger and weaker credits. This is a theme we have emphasized for some time, including in our in-depth work on the China credit outlook last summer.
A policy/credit tightening bias may put pressure on China equities in the near-term, particularly credit-dependent, investment-heavy cyclical sectors. Investors are unlikely to reward either option 1 or option 2 above, as the default option may trigger contagion and risks to growth (thus earnings as well) and the “bailout by financial institutions” option is structurally unappealing (thus risks valuation). Option 3 is probably the only outcome that would support a slight market rebound near-term, in our view, as immediate contagion is averted and listed financial conditions are protected from bearing losses—though at the cost of longer-term moral hazard.


Thursday Humor? The Real Reason Venezuela Matters

Tyler Durden's picture

With toilet paper shortages, record high stock prices, a lack of staple food supply, and a black market currency hyperinflating its way into solving the toilet paper shortage; many continue to wonder why they should care about a Latin American country's collapse into socialist revolution. The answer, simply put, lies in the following map...
Countries shaded by number of Miss World winners...
(h/t @Amazing_Maps )

A Venezuelan has been the winner of Miss World more times that any other nation... do you really want that to go away?

The Miss Venezuela contestants show that even with no toilet paper, one can still clean up nicely...
Now be a patriot and start buying Bolivars at the government rates...