Tag Archives: Bailout

DIY Eurozone Bailouts?

According to a new report by Germany’s Bundesbank, Eurozone countries on the verge of a default should draw on the private wealth of their citizens instead of asking others for help. The central bank has detailed a future template for bailouts which attempts to avoid the previous model used for Greece, Portugal and Ireland and has suggested that a one-off capital levy, in other words, a tax on people’s private wealth should be imposed in the first instance, if a country runs into problems.

The bank stressed that a country should exhaust its own possibilities to regain the trust in the sustainability of its public finances and that rescue programs financed by other member states’ taxpayers should only exceptionally be put into action as a last resort such as when the financial stability of the Eurozone is in real danger.

Complaints from northern European members about having to bail out their southern neighbours are commonplace and billions of euros have been used to prop up struggling countries. Greece, for example, has secured two international bailouts since mid-2010, totaling around $330 billion. The German government has always insisted on harsh austerity measures as a way for stricken countries to get their economies back on track and signaled their unwillingness to let the European Central Bank engage in quantitative easing which would potentially fuel inflation in its own nation.

The Bundesbank report looks to renew a debate as to whether German taxpayers should be on the line with future Eurozone bailouts, illustrating the fact that there is no support in the Eurozone for any large scale mutualisation of debts. This means that future loans could be more of a bail-in than a bailout-in, as seen in Cyprus. Hence, the message for countries wanting Eurozone bailouts in the future is, do it yourself!

Luck Of The Irish? Things Can Only Get Better…

Last year as a whole, Ireland was one of the best performing stock markets in the world. Things are getting better, yet even after this performance there are still plenty of problems and things are still pretty grim for most people. But from an investor’s point of view, it’s important to look at the overall direction, not just the absolute figures. Markets anticipate change – if you buy when everything looks rosy, the chances are you’ve missed the best gains and are getting in just in time for a fall.

One of the most visible signs of a recovery is that property prices are continuing to rise after five consecutive years of falls. Not surprisingly, the most dramatic rise has been in Dublin, where prices have surged more than 15% in the past year. National prices are up by more than 6%. The construction industry is recovering along with house prices. The latest GDP data shows that the sector grew by 2.2% in the last quarter alone. Confidence among managers in the sector is high, too. It’s not just the construction business. Firms in other industries are also optimistic. Irish capital investment shot up by 10.9% in the past quarter. It shows that companies are confident enough to put their cash to use.

Ireland is also slowly regaining control over its national finances. Having exited the bailout that saved it from national bankruptcy, it doesn’t have to rely on support from the Troika anymore giving it leeway to take modest measures to boost the economy, such as targeted tax cuts. Dublin expects to run a ‘primary surplus’ as early this year meaning the government will take in more money than it spends on everything excluding interest payments.

Ireland still has big problems. GDP is still well below the 2007 peak, deflation is a threat, and unemployment is still high but the overall signs are looking good. Tough economic measures are still needed for sure…together with a little luck of the Irish!

Chinese Fosun International Makes Billion-Euro Purchase in Portugal

Portugal put 80 percent of Caixa Geral SA insurance unit on sale and Chinese Fosun International Ltd. (656) won the bid for its purchase at 1 billion euro ($1.36 billion) over U.S. Apollo Management International LLP firm.

According to the Portuguese Secretary of State for Finance Manuel Rodrigues, Fosun International will complete the purchase in the insurer with its won funds.

Caixa Geral has been put up for sale as part of a condition for a European Union bailout of the class of 78 billion euro, which requires Portugal to dispose of assets and increase revenue. The Chinese company has been diversifying its overseas holdings since last year when it won approval to purchase the French resort operator Club Meidterrabee SA (CU) with Axa Private Equity last July.

Fosun International, moreover, already holds an insurance venture with U.S. life insurer Prudential Financial Inc. and is the operator of Peak Reinsurance in Hong Kong. It stakes also extend to Greek jewelry maker Folli Follie.

The Chairman of the company, billionaire Guo Guangchang, stated during an interview in New York last month that he plans to expand the company’s investments in U.S. commercial real estate after buying New York’s 1 Chase Manhattan Plaza.

Game-plan for Cyprus Bank?

As Cyprus continues to feel the after-effects of the recent bailout, it remains one of the places most devastated by the recent global economic crisis. In the midst of all the gloom and doom, it may come somewhat as a surprise that Hellenic Bank, the second-largest financial institution in Cyprus, now counts a developer of online strategy games among its biggest shareholders. Wargaming.net is spending 40 million euros to increase its stake in the bank, the “World of Tanks” gamemaker is poised to own 30 percent of Hellenic…hmmm, so where’s their banking track-record in a time when stability is so desperately needed? World of Tanks maybe, but certainly not world of banks! Besides, with Cyprus’s history, isn’t it ironic that a major investor is a developer of war-games?

Victor Kislyi started Wargaming in 1998, setting up the company’s headquarters in Cyprus, a popular tax haven long before any economic turmoil. Vedomosti, a Russian business publication suggested that the gamemaker probably had funds in the bank that got frozen and needed to buy into the bank to be able to withdraw them. Sounds like a pretty desperate strategy considering that game strategy is their USP! However, it may be Wargaming.net’s only remaining tactic…

Accounts in Cyprus were frozen in March to stop bank runs when euro-area finance ministers decided to tax deposits to raise money to aid in a rescue plan. Others with money trapped in Cypriot banks have taken similar steps to recover deposits: In September, several Russians were elected to the Bank of Cyprus board where capital controls blocked accounts. As a company, figures look good with sales of 218 million euros last year and 2,200 people employed in 16 locations around the world. “World of Tanks” has 65 million users and have just made their debut on the Xbox 360. They are also preparing to release “World of Warplanes” and “World of Battleships.” As of March 26, Wargaming.net had deposits in several banks including Bank of Cyprus, the nation’s largest. The game maker has not surprisingly expressed “uncertainties” regarding the situation in Cyprus and raises questions as to what strategy is next on the cards for Wargaming.net and to what the future holds for Hellenic Bank…

Cyprus Bailout Progress On Track - Troika

Cyprus continues on track with its bailout programme as all fiscal targets continue to be met with considerable margins, reflecting the ambitious fiscal consolidation underway, prudent budget execution, and a less severe deterioration of economic activity than originally projected, according to a statement from the Troika.

This is the second positive assessment in a row, paving the way for a 100 million euro disbursement of funds from the EU and 86 million from the IMF, according to the statement. “The economic situation remains difficult, although the recession has been less pronounced than expected. Based on recent indicators, output in 2013 is projected to contract by about 7.7 per cent, about 1 percentage point less than originally envisaged. Tourism and professional services have proven relatively resilient, and confidence has continued to improve gradually”, the statement said.

Good news is that the fiscal performance has remained strong, as authorities have maintained a cumulative primary surplus of about 0.7 per cent of GDP through end-September, meeting the programme targets comfortably and placing end-of year targets well within reach. Given the outturns to date, the 2014 fiscal deficit is expected to be about 1 per cent of GDP lower than originally anticipated. One positive sign has been new foreign direct investment in the banking sector, which, given the significant need to reduce high levels of private sector debt, is a good thing pointing towards a contracted output of 4.8 per cent in 2014. The 2014 budget remains conservative and seeks to bring forward part of the consolidation needed in the outer years to achieve and maintain a long-run primary fiscal surplus of 4 per cent of GDP, enough to put public debt on a firmly downward path. However, the risks surrounding the outlook remain substantial.

The nation is set to recover only gradually starting in 2015, driven by non-financial services. The authorities have already made important strides though with the recapitalisation and restructuring of the financial sector: Hellenic Bank has been successfully recapitalised with private funds, including foreign investment, and without state support, while Bank of Cyprus has a new Board of Directors and Chief Executive Officer and has put in place a restructuring plan aimed at returning the bank to profitability over the medium term. Funds for the recapitalisation of the cooperative credit sector have been secured in a special account and would not involve depositors. A Board of Directors for the Cooperative Central Bank has been appointed, and the restructuring of the sector is advancing, with four mergers of 28 institutions already completed.

Looking ahead, the main challenge is to repair the banks’ balance sheets and restore depositor confidence. This is key to the resumption of credit to the private sector, which is needed to support the economic recovery. According to the statement: “Diligent implementation of banks’ restructuring plans will be critical, including efforts to restructure the loans of viable borrowers in need, while discouraging strategic defaults. Payment restrictions will need to continue to be relaxed in line with the published milestone-based roadmap, while safeguarding financial stability. Finally, the authorities need to further strengthen the supervisory, regulatory, and Anti-Money Laundering implementation frameworks.”

Structural reforms are advancing. A governance structure has been put in place to carry out an ambitious revenue administration reform aimed at improving efficiency of collections. Progress is also being made on the reform of the social welfare system, which will introduce a guaranteed minimum income scheme providing financial assistance to those in need, including those currently not covered by public assistance. This is particularly important given the difficult economic conditions.

So far the authorities have implemented their strong and welcomed programme, but these efforts need to continue and be complemented by further steps to advance the privatisation agenda in the coming weeks. The next steps include the conclusion of this review which is expected to be considered by the Eurogroup, the ESM Board of Directors and the Executive Board of the IMF in December. Its approval would pave the way for the disbursement of €100 million by the ESM, and about €86 million by the IMF. Given the significant risks ahead, continued full and timely policy implementation remains essential for the overall success of the Cyprus’ bailout.

Will Greece Fail to Meet Its Next Bailout Target?

The IMF’s latest Fiscal Monitor Review published on Wednesday predicts that Greece may miss its next bailout target, since the country’s budget surplus has only risen to 1.1% of gross domestic product, failing so far to hit the target of 1.5% of GDP set by the IMF and the Eurozone in the bailout terms. Although Greece was predicted to be on track to meeting its targets in the IMF’s last report in April, problems with tax collection, slow growth, and delays in selling off state assets put Greece’s progress in the bailout programme in jeopardy. Should the country fail to meet its main objective, its emergency creditors (the IMF, the European Commission, and the European Central Bank) won’t proceed to issuing the next round of bailout financing, a factor likely to add pressure to the already tense negotiations over the upcoming tranche to help the troubled economy.
Source: Wall Street Journal

Portugal, Ireland to Avoid Disaster

Portugal and Ireland, two debt-ridden Eurozone economies will likely receive more time to repay their loans after a meeting between euro ministers in Dublin on Friday. The news was welcomed by both countries which have struggled tremendously with ailing recoveries after massive debt-crises. Both countries look to receive an additional seven years to pay back their debts and make a healthy and robust return to the financial markets.

The finance ministers would be wise to discuss the potentially catastrophic consequences of the bloated and bigger-than-expected Cyprus bailout package which could derail the small island nation and even lead to mass exodus. Such worries became more realistic after ti was rumored that Cyprus needs to cough up an additional 6 billion euros to cover the expenses thus increasing the total amount to 23 billion euros. The figure is higher than the size of the whole Cypriot economy.

Bailout Friday

Eurozone ministers meet in Dublin on Friday to discuss Cyprus bailout and the possibility of extending rescue package repayment dates for Ireland and Portugal. The first item on the agenda is Cyprus as ministers are readying for heated deliberations over the bailout conditions in exchange for the 10bn euros from the Eurozone and the International Monetary Fund. Nicosia is eagerly waiting for the first payment of 75 million euros, due in May, to pay for public sector wages. Discussions in Dublin will also revolve around the recent estimate according to which the restructuring of Cypriot banks will throw the country into a deep recession for at least two years.

Springtime for Hollande?

The French president Francois Hollande’s arguably disastrous policies have put France in the same category of failing economies as Greece, Spain and Italy. Recent reports from Brussels suggest that France is on a collision course with Germany and other countries that advocate for fiscal responsibility. A report released by the European Commission on Wednesday used harsh language to describe France’s financial situation.

“France’s public sector indebtedness represents a vulnerability, not only for the country itself, but also for the euro area as a whole,” said the EC report.

The report also stated that “the resilience of the country to external shocks is diminishing and its medium-term growth prospects are increasingly hampered by longstanding imbalances.”

EC went as far as to threaten France with sanctions if it fails to change course. The two protagonists in the unravelling Eurozone play, Germany’s Angela Merkel and Hollande have been at odds since Hollande was elected president. Their economic policies and visions differ fundamentally, as Merkel has emphasised fiscal responsibility, while Hollande has sworn in the name of big government policies to revive the French economy. If one is to look at all the relevant variables measuring a country’s economic health, Merkel has succeeded while Hollande – who is now extremely unpopular in France – is heading towards a massive failure.

Spain Continues to Disappoint

Reports this morning suggest that Spain is in the throes of an ever-deepening financial crisis. The country’s industrial production took another dive, falling by 6.5 per cent in February compared to the corresponding month in 2012. Earlier this morning, during a speech to the country’s parliament, Spain’s Prime Minister, Mariano Rajoy appealed the eurozone for solidarity. He asked that all countries take part in attempts to bring the region back from the verge of an economic abyss. Meanwhile, data from Italy and Spain also looked weak, while France’s industrial production only dropped by 2.8 per cent year-on-year in February.

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