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Super 8: Debt Boogeyman Overdone?
Had
dinner with a buddy last night and then we hooked up with another friend
to watch Steven Spielberg's Super 8. Hadn't been to the movies in a
long time and didn't know what to expect. It started off slow, but when
the action scenes hit the screen, I started getting into it. Won't
give away the plot, but the theme of the movie plays perfectly into my
latest topic, the debt boogeyman.
Tim Kiladze of the Globe and Mail reports, Greece weighs on Canada’s debt market:
Europe’s
debt crisis is thousands of kilometres away, but it’s helped to bring
Canada’s market for fixed-income financings grinding to a halt.
Even
though borrowing costs fell sharply in June, the volume of new debt
offerings by Canadian companies slid to its lowest level this year, as
investors’ anxiety about the possible implications of a Greek default
rose to new heights.
Typically, companies like
taking advantage of low rates, but they haven’t been able to this time
around because investors are too nervous to put money into new
corporate bonds, fearing that any negative news could send the value
of their new purchase plummeting. Should this hesitation continue,
issuers could be in trouble because many must borrow to fund their
growth strategies.
For the moment, the fears have been kept in
check. Greece’s parliament approved an austerity package last week,
and hopes that the European crisis is moving closer to a resolution
have helped to push down the spreads on Canadian provincial and
corporate bonds. Spreads are the extra yield that issuers must pay
above safer government bonds to compensate for added risk.
But
any sign that the European crisis isn’t contained could trigger a new
avalanche of worry. New financings were virtually non-existent in
Canada last week, with only one deal coming to market, and no new offers
have popped up since the long weekend. Plus, rating agency Moody’s
cut Portugal’s debt rating to junk status on Tuesday, which could
further hamper the fixed-income markets.
“People are
very, very cautious,” said fixed-income analyst Jean-François Godin at
Desjardins Securities. “You don’t need much of a story to make
investors shy or request higher spreads.”
Many investors seem content to park themselves on the sidelines and watch.
“Look how fast the sovereign crisis spread [between] Ireland, Greece,
Spain,” Mr. Godin said. “People know that if you buy at the wrong
time, all of the spreads can blow up in your face” – meaning yields
would move higher. Higher yields on bonds mean lower prices.
At
Alberta Investment Management Corp., which oversees $70-billion in
pension and other funds, chief executive officer Leo de Bever has even
started pressing to reduce the province’s exposure to bonds. Citing
problems like those in Greece, Mr. de Bever worries that systemic
changes could be under way, such as investors beginning to view
corporate bonds as a less risky product relative to sovereign bonds.
With such unpredictable outcomes, AIMCo would rather be less exposed to
the asset class.
Because investors are so skittish,
they are now demanding that corporations pay bigger spreads for new
issues, Mr. Godin said. While Greece’s troubles are far away, the
capital markets are so interconnected that European fears quickly
spread to Canada and investors have adopted a risk-averse mentality.
Even though yields are lower, corporate issuers have balked at paying
those higher spreads because they believe their risk hasn’t increased,
and that has contributed to the dearth of new issues.
However,
Greece isn’t the only culprit. A slew of companies financed from
January to March because they expected the Bank of Canada to hike
interest rates. Those firms have already raised their funding
requirements.Plus, Canadian banks typically dominate
new issues and they were particularly active during the first quarter,
as many home-buyers looked to borrow in advance of new, tighter rules
on mortgages. To fund the mortgages, the banks had to finance in the
public markets.
Following those two trends, the market has only
gotten shakier. “I think it’s wrong to attribute the decline in
yields to the worry about Greece alone,” said fixed-income strategist
Mark Chandler at RBC Dominion Securities. “Equally there was concern
about the weakness in some of the economic statistics” that started
coming out in April, he said.
In
response, investors started heading to the sidelines. Corporate
issuance of new bonds fell in April to $8.9-billion and has plummeted to
$4-billion in June. For the quarter, $20-billion was raised, versus
$32-billion in the first quarter.
But that doesn’t mean
all is lost, said Mr. Godin. “We had a very, very strong first three
months and obviously we could not support that kind of pace.”
The
trend also isn’t exclusive to Canada. South of the border, corporate
bond issues totalled $58.5-billion (U.S.) in June, the lowest total in
over a year, according to Bloomberg.
While there are
some signs of a turnaround, there are also fears that the market for
new issues will stay tight during the summer, when fixed-income
issuance is typically slower. That means companies may have a hard time
borrowing all the way until Labour Day.
Still, corporate
issuers appear ready to strike as soon as confidence shores up. “I
think there are a couple of deals, at least on the corporate side, that
are waiting to be brought back to the market once the crisis fades,”
Mr. Godin said.
This entire "debt crisis" is
starting to get on my nerves. Turn on the television and all you hear is
about how another country got downgraded to junk status by those
corrupt ratings agencies, the latest being Portugal. The timing of
these announcements is extremely fishy.
How corrupt are ratings agencies? Enough for Europe to issue a
full-throated assault on credit ratings agencies on Wednesday, saying
there were signs of bias against the European Union after Moody's downgraded Portugal's debt to "junk" status.
Moreover, according to Bloomberg,
European lawmakers called for restrictions on traders' use of
credit-default swaps to profit from defaults on sovereign debt they
don't own:
The European Union Parliament in
Strasbourg, France, also voted in favor of a ban on short selling of
government bonds in the EU unless traders have at least “located and
reserved” in advance the securities they intend to sell.
“Today we are sending a very strong political message,” Pascal
Canfin, a French lawmaker who is responsible the legislation in
Parliament, said after the vote. Negotiations on the measures with
governments in the 27-nation region will continue next week, he said.
Politicians including German Chancellor Angela Merkel and French
President Nicolas Sarkozy have claimed that naked short- selling and
credit-default swaps worsened the euro area's sovereign-debt crisis,
and have called for EU curbs. Michel Barnier, the EU's
financial-services chief, said last year such trades may lead to
“disorderly markets and systemic risks.”
The Parliament is seeking tougher curbs on short selling and sovereign CDS than those supported by most EU governments.
The assembly called for a ban on the buying and selling of
credit-default swaps on European Union nations' debt, unless the buyer
either owns the underlying security or another asset whose market price
moves in close tandem with it. That would allow investors to take out
insurance if they know that a default would harm their non-sovereign
holdings such as shares in companies in the defaulting nation.
Greek Crisis
Greece's fiscal crisis shows “how urgent and necessary legislation
in this field is,” Canfin said in an e-mailed statement. “Traders
dealing in Greek CDS are throwing oil on the fire, with their only goal
being that of making money.”
The Alternative
Investment Management Association, which represents hedge funds, has
warned that a naked CDS ban could “push up government borrowing costs.”
Finance ministers from the 27-nation region agreed in May that
traders should be allowed to short sell government bonds and stocks if
they have a “reasonable expectation” that they can obtain the
underlying securities. They also rejected calls from Germany for a ban
on sovereign CDS.
Here are my thoughts on this. Normally, I would agree that these
regulations will only drive up interest rates and thus government
borrowing costs, but the reality is that large hedge funds and bank prop
desks have profited enormously from speculative activity via naked CDS.
In other words, they're talking up their books, which is why they
loathe regulation in this area. (While they're at it, regulators should
also enforce the law and ban naked short selling in the stock market!).
All this to say
that the Europeans are finally waking up to the corrupt nature of
ratings agencies and their hedge fund masters. They work together to
make enormous profits. This whole debt crisis has been blown way out of
hand so that the financial oligarchs can engorge themselves as they
collect 2 & 20, claiming they're delivering true alpha. Remember the
story of the bankers going to Louis the XIV to tell him that France was
insolvent. I have a feeling my buddy is right, today's bankers and
hedge fund "royalties" are pushing the limits and they will suffer the
same fate.
That's why I'm not overly concerned with the debt
boogeyman and remain long risk assets, realizing that while train wrecks
make great movie scenes (see below), in the real world, there isn't
going to be a massive debt derailment unless you give speculators
and rating agencies free reign. It's high time regulators cut off the heads of ratings
agencies and greedy speculators who are wreaking havoc on global credit
markets and causing irreparable damage to the real economy.
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Leo, Leo, Leo.........
see no evil, hear no evil, speak no evil
No, actually it is more accurate to say:
leo, leo, leo .... see evil, hear evil, speak evil, embrace evil, LOVE evil!
Somebody get this guy a job already. The nonsense spewing from him gets worse each day.
I have to figure out how to get my Google Reader to filter articles so they don't show up anymore.
++
Leo - Real life is not reel life. Get that straight and you will see light rather than cursing the darkness of "greedy speculators".
Very funny! In the long run we are all doomed. In the medium run we are all doomed. Only in the short run are only some doomed.
Leo,
Have for some time now, appreciated your posts, comments, optimism and sincerity. I have professionally managed money also, although 25-30 years ago, in NYC, private pensions and corporate programs. When you say "there isn't going to be a massive debt derailment unless you give speculators and rating agencies free reign", I have to respectfully and completely disagree. The derailment has already taken place. We are simply in that moment of time between when the train jumps the tracks and the last groans of the fatally injured are heard. There is much mayhem ahead to hear, see, measure, record, quantify, lament, and curse.
Consider the third swirl of five swirls before the flush is complete.
There is time to change, adapt, modify, and redesign strategies to preserve the purchasing power of your clients, but it involves re-defining the goal and the radian of progress that can be calculated.
Good luck, and we bid you peace and the understanding of things in the darkness.
Would you mind flying up and having lunch with Leo? We will have one of our operatives hide a paintball gun in the men's room for you to use.....
CDS's in Italy were blowing out yesterday. "There's no containment." Stick with Banzai on this one. Unless of course you want an American Interevention. Wall Street coming to town is one thing--Uncle Sam on the other hand...
So let me get this straight. If the ratings agencies are behind the curve on sub prime they are corrupt . If the ratings agents try to get ahead of the curve on sovereign debt they are corrupt. Instead of blaming the ratings agencies how about blaming the governments ,corporations, or people who take on too much debt? How about blaming the people who don't do their own due diligence when they purchase the debt? If investors did their own due diligence we wouldn't need rating agencies.
Hey Leo, by the way, if you're long risk assets you're speculating.
There is no point in trying to apply logic to their position. It's like Obama explaining the difference between Libya and Bahrain.
Homey don't do geo-graphy.
Leo's positions are, quite frankly, untenable.
It's like he thinks the pension funds have a god-given right to be profitable on their investments.
++
where are the chicks?
That deer in the headlights has a name and it is Leo.
Push that pedal to the metal then!
Happiness is a long. bloody smear on the highway that spells "leo".
Say, you must be taking a breather. I was expecting to see a big brawl here, am I early?
That's why I'm overly concerned with the debt boogeyman and remain long risk assets, realizing that while train wrecks make great movie scenes (see below), in the real world, there isn't going to be a massive debt derailment unless you give speculators and rating agencies free reign. It's high time regulators cut off the heads of ratings agencies and greedy speculators who are wreaking havoc on global credit markets and causing irreparable damage to the real economy.
Leo , the biggest speculator is the fucking ECB and Fed.
Sheesh is it hard to breath on your planet ?
All I have to read is the blame is on 'greedy speculators' to know the author is a fucking idiot!
I prefer to call them Fucking Criminal Bankster Blessed Paper Propping Speculators.
Leo is being polite.
My take is that Ratings Agencies and Speculators ( Goldman, Morgan, ect. ) share the blame for wholesale larceny.
Please add to that the approval and enablement of the FED and US gov.
...and last but most important an ignorant consumer culture.
You have forgotten the general population which now expects benefits to appear out of thin air, and which consistently "votes themselves money" in the words of de Tocqueville.
This column is idiotic even by the standards we apply to Leo's usual drivel.
You have forgotten the general population which now expects benefits to appear out of thin air, and which consistently "votes themselves money" in the words of de Tocqueville.
This column is idiotic even by the standards we apply to Leo's usual drivel.
Of course it is "greedy speculators" causing havoc in world finance.
Who else could be to blame, our helpful Central Banks and collusive governments?
These debt raters move markets, interesting they were the ones to bless the subprime mess, and now have decided to pour cold water over Euro restructuring. Follow the money tto find who is pulling the strings. Maybe the world needs a unimpeachable debt rating agency, who will work along side with the honest bankers, and the unicorn whisperer.
The real story here is that the big banks are the ones who have written the naked CDS, and that is why the ECB/IMF are so intent on restructuring while at the same time avoiding a "credit event". I suspect this is another AIG situation: the banks that wrote these CDS have probably reserved next to nothing for the losses that they are going to have to take.
There are only 2 choices which are substantively similar: outright default and take the loss, or socialize the losses by money printing.
you are overly concerned, or youre not?
dont worry I know what you mean. and just when we thought you might be finally starting to see you stumble backwards from anger to denial again..
Leo:
If you're long risk assets, aren't you speculating that those assets will rise in value for the purposes of making a profit? How are you then different from a "greedy speculator"?
Regarding pension funds in general, maybe if they stopped promising an alpha above the risk free rate - expenses, then they wouldn't be perpetually stuck holding bags of shit. Pensions are supposed to be airtight stores of retirement money, not dumb money exploit vehicles for I-banks. And trust me, you (and just about every pension manager out there) are the dumb money.
No wonder ratings agencies don't want to do their jobs--every aparatchik in the world comes after them if they tell the truth--shameful.
THERE'S the word that I have been looking for for so long in regard to leo: "aparatchik".
That describes him to a "T".
Not...just edited it!