Monthly Archives: October 2014

International Bankruptcy Law back on the Agenda?

Elaine Moore writes in the FT that the idea of an international bankruptcy law gains traction, after IMF suggestions in the early 2000s for a “Sovereign Debt Restructuring Mechanism” failed to receive sufficient support. In September, 124 UN General Assembly members supported the proposal to develop a legal framework for restructuring sovereign debt.

This proposal complements the agreement among market participants, international organisations and regulators (against the backdrop of Argentina’s latest default) to change bond clauses with the intention to facilitate renegotiation through binding majority decisions.

The End of Bank Secrecy?

Jeevan Vasagar and Vanessa Houlder report in the FT about the pledge by 51 countries to facilitate the collection and exchange of information on bank accounts and the beneficial ownership of companies and other legal structures. The agreement was drawn up by the OECD and previously endorsed by the G20. Going forward, the countries involved seek a consensus on the treatment of intellectual property income.

Christoph Eisenring in the NZZ and the FAZ provide additional information. Liechtenstein, Luxemburg, Bermuda, the British Virgin Islands and the Cayman Islands signed the accord; Switzerland and Singapore promised to follow soon; Panama and the US didn’t. German finance minister Wolfgang Schäuble declared the end of bank secrecy. While not signing the agreement the US is credited for helping to make it possible, due to the FATCA treaties is has signed with many countries. Those treaties also stipulate an automatic exchange of tax information. However, so far the US has not produced the legal base to provide such information to foreign governments.

Regulation of Fannie Mae and Freddie Mac

The Economist reports about plans to have Fannie Mae and Freddie Mac accept mortgages for intermediation and insurance even if these mortgages only satisfy weaker lending standards than those currently required by the two government sponsored entities. (Fannie Mae and Freddie Mac buy eligible mortgages, repackage and guarantee them and sell them on to investors.) The plans to accept laxer lending standards appear to be motivated by the aim to improve the affordability of home ownership for risky borrowers. The same aim is widely credited to have contributed towards sowing the seeds of the recent financial crisis.

High School (Gymnasium) Graduation Rates in Switzerland

Jörg Krummenacher reports in the NZZ that roughly 20% of a cohort graduate from Switzerland’s most academic type of high school (Gymnasium). In the canton of St. Gallen, only 13% do. Not surprisingly, these St. Gallen high school students do well in standardized PISA tests.

Also, running one additional class of students in high school costs nearly 500 000 Swiss Francs per year. About 80% of St. Gallen pupils entering Gymnasium graduate with the “Matura.”

Sovereign Debt Composition in Advanced Economies

S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy and Malin Hu report in Vox about their debt structure database spanning the period 1900–2011 and covering Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, the Netherlands, Spain, Sweden, the UK, and the US. Data is disaggregated along the following dimensions: Currency; maturity (of local currency debt); marketability; holders (non-residents, national central bank, domestic commercial banks, rest).

Their main findings are:

  • Advanced economies’ debt typically was denominated in local currency, with the exception of post-WWI France and Italy.
  • Governments issued longer-dated paper in good times.
  • The share of central government debt that was issued in the form of marketable securities declined until after World War II and increased again in the 1970s, to around 80% today.
  • National central banks and domestic commercial banks held about 30% of the debt until 1970. Afterwards, non-resident participation in sovereign debt markets soared.
  • Large increases in debt often were accompanied by a rise of short-term, foreign currency-denominated debt held by the banking system, with the exception of the 1980s and 1990s where more long-term local-currency marketable debt was issued.
  • Evidence for financial repression in combination with inflation after World War II.

They suggest that countries mainly followed two strategies to reduce debt quotas. One, based on fiscal consolidation and moderate inflation, going hand in hand with long maturities. The other, based on high inflation and reliance on debt holdings by captive domestic investors, going hand in hand with shorter maturities.

Link to the data.

ECB Bank Stress Test

Claudia Aebersold Szalay reports in the NZZ on the findings of the stress test conducted by the ECB. The article contains a map and tables.

The ECB downgraded the quality of bank assets (mostly bad loans) relative to banks’ own estimates. This is reflected in lower estimates of banks’ equity positions. Moreover, the ECB conducted a stress test and considered two scenarios. According to the adverse one, banks’ equity positions would fall by more than 250 billion Euros. Italy, France and Germany would be hit hardest.

Claire Jones and Alice Ross as well as Martin Stabe offer additional insights in the FT, FT. A report in the FAZ. The ECB‘s page with press release and other information.

Teacher Well Being

sda reports in the NZZ about a study on Swiss teachers’ well being that was commissioned by the Swiss National Science Foundation.

A representative survey among 600 teachers in 5th to 9th grade indicates that every fifth teacher always feels stressed and every third teacher suffers from forms of depression at least once per month. The teachers feel strained because of high work load; conflicts with students’ parents; and difficult pupils. Women and part time teachers are more exposed to the risk of burnout.

Other employees in the public sector do not feel similarly stressed. Nevertheless, nine out of ten teachers like their jobs.

Government, Household and Corporate Debt in the Euro Area

The Economist reviews developments on the debt front:

Between 2007 and 2013 the ratio of government debt to GDP in the euro area rose from 66% to 93%. The spike was more dramatic in the periphery (see chart): in Greece the ratio increased to 175% and in Portugal it virtually doubled to 129%.

The figure in the article shows debt quotas in six countries between 2007 and 2013. The article continues:

Despite Italy’s staggering government debt, its households owe less than Germany’s and its non-financial companies not much more. Spain’s private sector has deleveraged substantially over the past few years, as big recapitalisations have left its banks better able to withstand write-downs of bad loans.

One conclusion put forward is that governments will not be able to reduce debt quotas in the foreseeable future to the levels before the financial crisis.

Dangers of Deflation

The Economist worries about deflation, specifically in the Euro area. The central passages are:

Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand. Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts—debts which, in real terms, will grow more burdensome under deflation.

… bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse.

Bicycling in Copenhagen

People in Copenhagen like to take the bike. During rush hour, the bike lanes are more crowded than the car lanes. Cyclists have developed a code of conduct that appears to be Copenhagen (or Denmark) specific. When stopping or preparing to turn left, they signal their intention to do so and quickly move aside not to block traffic.

Banking Union

Willem Buiter, Ebrahim Rahbari and Antonio Montilla provide a detailed assessment of the need for a Euro Area banking union and the progress towards it, in a Citi Research document. Some excerpts from the abstract:

… a single supervisor, a common resolution mechanism, including a joint recapitalisation back-up, and an effective lender of last resort – is necessary for the euro area (EA) to survive.

The CA’s [comprehensive assessment’s] conclusion will likely boost EA financial conditions in coming months. Even so, we believe the CA should have been more stringent, current backstops are still inadequate, and the CA will not eliminate divergences in financial conditions …

Remaining elements of narrow banking union are also very important — These are the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). In particular, the SRM and its bail-in provisions should materially reduce the likelihood that an EA sovereign will be dragged into insolvency through tax-payer-funded bank bailouts. Reduced moral hazard will also likely lower the likelihood and severity of future banking crises. And the combination of CA, SSM and SRM are also likely to mean that the ECB will be an effective lender of last resort for EA banks (and sovereigns).

… one key fragility remains: excessive two-way links between national sovereigns and banks. Risk-weighting of sovereign debt and concentration limits on sovereign debt holdings by banks are necessary to break these links.

A single deposit guarantee scheme is not necessary for monetary union and requires a deeper fiscal union than the minimal common backstops required to make monetary union work. It is therefore unlikely in the foreseeable future, in our view. An EA sovereign debt restructuring mechanism (SDRM) may be necessary to handle legacy sovereign debt restructurings and possible future sovereign insolvencies, but beyond the limited mutualised fiscal backstops necessary for banking union and the SDRM, deeper fiscal union is neither necessary for EA survival nor likely, for political reasons, in the foreseeable future.

The report contains many interesting figures, for example on the exposure of banks to their domestic governments; the correlation between sovereign and bank CDS spreads; lending standards; the share of bank loans in banks’ balance sheets etc.

Large Banks Promise not to Terminate Distressed Derivatives Contracts

Philip Stafford and Tracy Alloway report in the FT that under the stewardship of the International Swaps and Derivatives Association, large banks

have agreed to give up their rights to immediately end derivatives contracts with crisis-hit rivals after global regulators pressed for an industry cross-border agreement to stop counterparties terminating deals with troubled institutions.

The agreement covers 90% of the OTC derivatives market. Incentives to live up to it are weak; not amending one’s contracts with counter parties amounts to the dominant strategy in a prisoners’ dilemma situation. Moreover, institutional investors may have fiduciary duties to end their contracts if a counter party defaults so attaining the cooperative equilibrium may not be possible without legal changes.

DN: But if the initiative succeeds, could it undermine the effective seniority status of derivatives?