Tag: finance

Bloomberg reports that Citigroup has failed the Fed’s new round of stress tests:

Citigroup Inc.’s capital plan was among five that failed Federal Reserve stress tests, while Goldman Sachs Group Inc. and Bank of America Corp. passed only after reducing their requests for buybacks and dividends.

 

Citigroup, as well as U.S. units of Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Banco Santander SA, failed because of qualitative concerns about their processes, the Fed said today in a statement. Zions Bancorporation was rejected as its capital fell below the minimum required. The central bank approved plans for 25 banks.

In reality, Citi “flat lined” – went totally bust – in 2008.  It was insolvent.

And former FDIC chief Sheila Bair said that the whole bailout thing was really focused on bringing a very dead Citi back from the grave.

Indeed, the big banks – including Citi – have repeatedly gone bankrupt.

For example, the New York Times wrote in 2009:

Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.

So why did the U.S. government give Citi a passing grade in previous stress tests?

Because they were rigged to give all of the students an “A”.

Time Magazine called then Secretary Treasury Tim Geithner a “con man” and the stress tests a “confidence game” because those tests were so inaccurate.

But the bigger story is that absolutely nothing was done to address the causes of the 2008 financial crisis, or to fix the system:

• Even though everyone knows that breaking up the big banks is essential to stabilizing the economy, it hasn’t happened. Indeed, they’re bigger than ever

• The faulty incentive system – huge bonuses that encourage reckless risk-taking by bankers – are still here

• Even though rampant speculation helped destabilize the economy, speculation has shot through the roof

• Another big problem – shadow banking – has only gotten worse

• Derivatives?  Washington has poured gasoline on the fire

• Cracking down on fraud and holding criminals accountable?  Nope … just phony P.R.

Indeed, the only the government has done is to try to cover up the problems that created the 2008 crisis in the first place … and to throw huge amounts of money at the the guys who caused the mess in the first place.

via Zero Hedge http://ift.tt/1jNjJex George Washington

Submitted by Michael Krieger of Liberty Blitzkreg blog,

One of the primary topics on this website since it was launched has been the extremely destructive and explosive rise of crony capitalism throughout the USA. It is crony capitalism, as opposed to free markets, that has led to the gross inequality in American society we have today. Cronyism for the super wealthy starts at the very top with the Federal Reserve System, which consists of topdown economic central planners who manipulate the money supply and hence interest rates for the benefit of the financial oligarch class. It then trickles down through lobbyist money into the halls of Washington D.C., and ultimately filters down to local governments and then the average person on the street gaming welfare or disability.

As such, we now live in a culture of corruption and theft that is pervasive throughout society. One thing that bothers me to no end is when fake Republicans focus their criticism on struggling people who need welfare or food stamps to survive. They have this absurd notion that the whole welfare system doesn’t start with the multinational corporations and Central Banks at the top. In reality, it is at the top where the cancer starts, and that’s where we should focus in order to achieve real change.

That’s where a new report from Open the Books on corporate welfare comes in. In a preview of the publication, the organization notes:

If Republicans are going to get truly serious about cutting government spending, they are going to have to snip the umbilical cord from the Treasury to corporate America.  You can’t reform welfare programs for the poor until you’ve gotten Daddy Warbucks off the dole. Voters will insist on that — as well they should.

 

So why hasn’t it happened? Why hasn’t the GOP pledged to end corporate welfare as we know it?

 

Part of the explanation is that too many have gotten confused about the difference between free-market capitalism and crony capitalism.

 

 

And part of the problem is corporate welfare that is so well hidden from public view in the budget that no one has really measured how big this mountain of giveaway cash to the Fortune 500 really is. Finding out is like trying to break into the CIA.

 

Until now. Open the Books, an Illinois-based watchdog group, has been scrupulously monitoring all federal grants, loans, direct payments and insurance subsidies flowing to individuals and companies.

 

It’s an attempt to force federal agencies to release information on where the $4 trillion budget is really spent — and Open the Books will release a new report on corporate welfare payments to the Fortune 100 companies from 2000 to 2012.

 

Over that period, the 100 received $1.2 trillion in payments from the federal government.

 

That number does not include the hundreds of billions of dollars in housing, bank and auto company bailouts in 2008 and 2009, because those payments and where they went are kept mostly invisible in the federal agency books.

As suspected, the biggest welfare queens in the U.S. are the super wealthy themselves, but they’d rather you focus on some single mother on welfare simply trying to survive.

via Zero Hedge http://ift.tt/1lnAVf5 Tyler Durden

With copper, iron-ore, soybeans, and nickel all tough to carry when you need liquidity from your commodity-financing deals; it appears the Chinese people have turned to more spectaculr methods of moving ‘wealth’. As The South China Morning Post reports, just week after a man was stopped at the China-Hong-Kong border with 4 kilograms of gold in his shoes, customs officers caught a man smuggling more than 7000 diamonds in plastic bags in his underwear. The tell, officers noticed he was walking in a pculair manner.

 

Via The South China Morning Post,

A man from Hong Kong was caught at a checkpoint at Shenzhen trying to smuggle more than 7,000 diamonds in his underwear, according to a mainland media report.

 

The man was stopped at the Shenzhen Bay crossing last Thursday after customs officers noticed he was walking in a peculiar manner, the Guangzhou Daily said.

 

Officers searched him and found a small plastic bag in his underwear containing thousands of small diamonds, semi-finished stones and gold jewellery.

 

The report said customers officers spent several hours counting 7,443 small diamonds, plus 10 pieces of jewellery weighing about 130 grams.

 

Anti-smuggling officers are investigating.

 

Another Hong Kong man was caught at the Lo Wu crossing in January trying to smuggle 4kg of gold in his shoes, according to the Southern Metropolis Daily newspaper.

Maybe he would have made it if he wore the diamonds like this?

 

However, this Chinese gentleman has nothing on a female smuggler entering Toronto (from Trinidad):

The RCMP disclosed that more than 10,000 diamonds were found inside the body of 66-year-old Helena Freida Bodner, who arrived on a flight from Trinidad, but cannot confirm how the diamonds got into her body.

Seems diamonds are a smuggler’s best friend, as the Shanghaiist notes, as undesirable as diamonds in your underpants seem…

is still a preferable alternative to those Taiwanese smugglers who were arrested while holding 24 pieces of gold up each of their rectums last July.

via Zero Hedge http://ift.tt/1huRM8P Tyler Durden

Submitted by Claude Salhani via OilPrice.com,

Yes, Russia is guilty of meddling in Ukraine, but then again so are the United States and the European Union. The major difference is that far less was said and much less reported by the international media over the Americans’ and Europeans’ interference than of Russia’s actions and the reactions it caused.

Where Russia is involved many in the West believe that one only needs to scratch the surface to see traces of the old Soviet Union begin to resurface. After all, Russian President Vladimir Putin is a former KGB officer. The truth is much more complicated than that: or perhaps somewhat simpler.

The Cold War that divided the East and West maybe over but the old rivalry still lingers. The rivalry between the West and Russia is no longer one over diverging political philosophies, but purely over resources – and the capitalistic gains they produce from mainly oil, gas and pipelines.

The West and in particular the United States seems to be suffering from collective memory disorder and have forgotten all the mud they slapped onto Putin’s face during the past 15 or so years. Or at least they expected him to forget and forgive.

But then again Russian troops did move in to grab control of Crimea, taking over the territory from the Ukrainians. You can counter that argument by pointing to the US and NATO, who not only interfered, but swallowed former Soviet domains bringing them into the North Atlantic alliance, pushing NATO closer to Russia’s borders.

Yes, Russia needs access to warm water ports for its Black Sea fleet and many analysts also believe that this is a major issue of concern for Moscow, which it is. But the plot, as they say, thickens.

There is also another reason for Putin’s intervention in Ukraine and that has to do with Russia elbowing for dominance of the very lucrative and strategically important “energy corridors.”
That is very likely to be the major reason why Putin is willing to risk going to war with the West over Crimea, the pipelines that traverses the Caucasus and the oil and natural gas these pipelines carry westwards to Europe.

Given the geography of the region there are only so many lanes where the pipelines can be laid; and most of them transit through Ukraine. Others travel across Azerbaijan and Turkey. Most of Western Europe’s gas and much of Eastern Europe’s gas travels through Ukraine.

If Russia has vested interest in “recolonizing” Ukraine, the United States on the other hand has its own interests in Ukraine and other former Soviet areas.

What is going on today is nothing short of a race for control of what’s going to dominate the energy markets over the next two or three decades: the energy corridors from Central Asia, the Caucuses and through Russia and Ukraine.

As stated in a report published by the Woodrow Wilson International Center for Scholars, “the proclamation of independence, the adoption of state symbols and a national anthem, the establishment of armed forces and even the presence on Ukrainian territory of nuclear missiles—all important elements of independent statehood—amount little if another power, Russia, controls access to fuel without which Ukraine cannot survive economically.

That same report denotes that "Ukraine's strategic location between the main energy producers (Russia and the Caspian Sea area) and consumers in the Eurasian region, its large transit network, and its available underground gas storage capacities," make the country "a potentially crucial player in European energy transit" – a position that will "grow as Western European demands for Russian and Caspian gas and oil continue to increase."

Ukraine's dependence on Russian energy imports has had "negative implications for US strategy in the region."

As long as Russia controls the flow of oil and gas it has the upper hand. Russia's Gazprom currently controls almost a fifth of the world's gas reserves.

More than half of Ukraine’s and nearly 30% of Europe's gas comes from Russia.  Moscow wants to try and keep things going its way; Washington and Brussels find it in their interests to try and alter that by creating multiple channels for central Asian and Caspian oil to flow westwards.
Ukraine today finds itself in the center of the new East-West dispute.

Ironically, the very assets that make Ukraine an important player in the new geopolitical game being played out between Washington and Moscow is also its greatest disadvantage.

via Zero Hedge http://ift.tt/QhPjbN Tyler Durden

One of our favorite charts summarizing perfectly the Chinese credit bubble, better than any other, is the following which compares bank asset (i.e., loan) creation in China vs the US.

 

It goes without saying that while the blue line has troubles of its own (namely finding the proper rate of liquidity lubrication to keep over $600 trillion in derivatives from collapsing into an epic gross=net garbage heap), it is the red one, that of China, where $1 trillion in credit was created in the fourth quarter alone, that is clearly unsustainable for the simple reasons that i) China will quickly run out of encumbrable assets and ii) the bad, non-performing loan accumulation has hit an exponential phase, which incidentally is why Beijing is scrambling to slow down the “flow” from the current unprecedented pace of $3.5 trillion per year.

It is also because of this wanton and mindblowing capital misallocation (the de novo created debt goes not into profitable, cash flow generating ventures, but into fixed asset investments which create zero and potentially negative cash flow, due to China’s already epic overinvestment resulting in ghost cities, and building that fall down weeks after their erection) that China has finally decided to provide lenders with the other much needed component of the return equation: risk. This, in the form of debt defaults, something unheard of in China for two decades.

Which brings us to today, when we find that China’s credit formation, until now proceeding at a breakneck speed, has suddenly ground to a halt. Reuters explains:

Some of China’s struggling firms are finally getting the reception that regulators have been hoping for – a cold shoulder from banks in the form of smaller and costlier loans.

 

Reuters has contacted over 80 companies with elevated debt ratios or problems with overcapacity. Interviews with 15 that agreed to discuss their funding showed that more discriminate lending, long a missing ingredient of China’s economic transformation, has become a reality.

 

Up against a cooling Chinese economy and signs that authorities will not step in every time a loan goes bad, banks are becoming more hard-nosed and selective about whom they lend to.

 

…

 

For household goods maker Elec-Tech International Co Ltd (002005.SZ), less credit is the new reality. Its bank cut its borrowing limit by 500 million yuan ($80.79 million) to no more than 2.5 billion yuan this year, said Zhang, an official at Elec-Tech’s securities department.

 

“Last year, the bank gave us a discount on our interest rates. This year, we probably won’t get any discount,” Zhang who declined to give his full name said. “It feels like banks are not lending and their checks are becoming more rigorous.”

 

…

 

There are signs that even state-owned firms, in the past fawned over by lenders for their government connections, have to contend with higher rates, lower lending limits and more onerous checks by banks.

 

“Interest rates are going up 10 percent for the entire industry,” said Wang Lei, a finance department manager at PKU HealthCare Corp. “Obtaining loans is getting difficult and expensive.”

Here’s why PKU Healthcare will likely be among the first to experience what happens when the liquidity runs out:

PKU HealthCare, which is controlled by Peking University and makes bulk pharmaceuticals, has struggled to remain profitable. Its debt-to-EBITDA (earnings before interest, tax, depreciation and amortization) ratio exceeded 60 at the end of September, four times the average for listed Chinese companies from the sector.

That’s the kind of leverage that not even Jefferies would sign a “highly confident letter” it can raise a B2/B- debt deal at 10% or less. It is also a huge problem for Chinese corporates which suddenly realize they have just a tad too much debt on their books.

Some gauges of China’s corporate debt are already flashing red. Non-financial firms’ debt jumped to 134 percent of China’s GDP in 2012 from 103 percent in 2007, according to Standard & Poor’s. 

 

It predicted China’s corporate debt will reach “stratospheric levels” and become the world’s largest, overtaking the United States this year or next.

 

Fearing a wave of defaults as China’s economy cools after decades of rapid growth, regulators in the past two years told banks to cut off financing to sectors plagued by excess capacity such as steel and cement. 

 

Experts say banks were at first slow to respond, but in the past few months, banks have started turning down credit taps.

 

“We have become more prudent in issuing loans,” said a spokesman for Bank of Ningbo. He added that the bank has intensified communication with companies in troubled sectors or borrowers deep in debt.

 

“Under normal circumstances, we would review company loans every quarter or every six months, but for the sensitive cases, we will step up channel checks and work closely with the companies.”

 

Another manager at a regional Chinese bank said it was overhauling its lending in cities identified as high-risk, such as Urdos and Wenzhou. Located in Inner Mongolia, Urdos is infamous for its clusters of empty apartment blocks that pessimists say is an emblem of China’s housing bubble. Wenzhou, is China’s entrepreneurial hotbed that recently lost its shine after local property boom went bust.

So with increasingly more uber-levered companies suddenly blacklisted by the banks, what do they do? Why go to the shadow banking system for last ditch liquidity of course, where it will cost them orders of magnitude more to stay viable for a few more weeks or months.

Ss companies bend the rules, risks shift outside the banking system into the universe of networks of seemingly unrelated firms connected by murky financial deals. For example, trade loans subsidized by the government to help selected sectors are quietly re-directed by companies to other unrelated businesses, firms say. New financing methods also emerge as easy credit dries up. 

 

The latest plan hatched by a cash-strapped aluminum end-user involves having banks buy the metal and re-selling it to firms who pay out monthly loan plus interest.

How do you spell re-re-rehypothecation again… while selling the collateral…. again? Remember this: it really does explain all one needs to know about China.

“The local government has intervened, fearing social unrest. A local buyer of a unit in the office building committed suicide as he/she could not obtain the title to the property due to the title dispute between the trust and the developer.”

Anyway, continuing:

Others such as Xiamen C&D Inc, an import and export firm, are directly cashing in on firms’ thirst for funds. Xiamen C&D, which borrows at less than 6 percent per year is offering loans of several hundred thousand yuan to smaller firms at 7-8 percent, said Lin Mao, the secretary of Xiamen’s board of directors.

 

For larger companies, typical loans amount to 20-30 million yuan, and are 90 percent insured by Chinese insurers, he said.

 

Banks grow more aware of the risks. But rather than pull the plug on teetering firms, some bankers say they prefer a slow exit to keep them afloat for as long as possible to claw back their loans.

Unfortunately, for most the can kicking is now over. Which brings us to the second part of this story – China’s housing bubble, and specifically how its foundations – China’s own property developer firms – just imploded as a result of all the above. Also from Reuters:

China’s property developers are turning to commercial mortgage-backed securities and looking at other alternative financing as creditors grow more discriminating in the face of rising concerns about the country’s real estate and debt markets.

Bond buyers are shying away from second-tier developers because property sales have cooled as the economy slows. The expected bankruptcy of a local developer and the country’s first domestic bond default this month have heightened scrutiny of borrowers.

The property companies have a renewed sense of urgency to raise capital after U.S. Federal Reserve Chairman Janet Yellen indicated the central bank, which sets the tone globally for borrowing costs, may raise interest rates as early as the spring of 2015, sooner than many investors had anticipated. Higher rates mean higher borrowing costs, both for the companies and for their home-buying customers.

Highlighting the search for alternative funding avenues, property fund MWREF Ltd earlier this month issued the first cross-border offering of commercial mortgage-backed securities (CMBS) since 2006. The offer was priced at a yield lower than two dollar bonds issued last week, IFR, a Thomson Reuters publication, said.

“The market will see more of these products,” said Kim Eng Securities analyst Philip Tse in Hong Kong. “It’s getting harder to borrow with liquidity so tight in the bond market. It’s getting harder for smaller companies to issue high-yield bonds.”

The notes, issued through a MWREF subsidiary, Dynasty Property Investment, were ultimately backed by rental income from nine MWREF shopping malls in China and were structured to give offshore investors higher creditor status than is normally the case with foreign investors. MWREF is managed by Australian investment bank Macquarie Group Ltd, which declined to comment.

 

Beijing Capital was the first Hong Kong-listed developer to issue dollar senior perpetual capital securities last year, an equity-like security that does not dilute existing shareholders.

 

“As market liquidity is changing constantly, we have to keep adapting and exploring different funding channels,” said Bryan Feng, the head of investor relations.

 

Chinese regulators last week allowed developers Tianjin Tianbao Infrastructure Co. and Join.In Holding Co. to offer a private placement of shares, opening up a fund raising avenue that had been closed for nearly four years.

 

New rules were also unveiled last week allowing certain companies to issue preferred shares, including companies that use proceeds to acquire rivals.

 

“As liquidity tightens and developers see more pressure…they may consider M&A via preferred shares,” said Macquarie analyst David Ng.

CMBS, senior perpetuals, preferreds: what is the common theme? This is last ditch capital, far more dilutive of equity, and one which always appears just before the final can kick. As such, it means that the credit game in China is over. And now the only question is how long before the market realizes the jig is up.

Some already have. As we reported last week, “Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.”

In other words, those who sense which way the wind is blowing have already entered liquidation mode. Because they know that those who sell first, sell best. Soon everyone else will follow in their shoes, unfortunately they will be selling into a bidless market.

Until then, we will greatly enjoy as finally, after many years of delays, the dominoes start falling.

As of March 15, Chinese developers had issued 15 U.S. dollar bonds raising $7.1 billion so far this year, compared with 23 issues that raised $8.1 billion in the year-earlier period. “That said, quite a number of developers have demonstrated the ability to access alternative markets, such as the offshore syndicated loan markets as another means of raising capital,” said Swee Ching Lim, Singapore-based credit analyst with Western Asset Management.

 

Offshore syndicated loans for Chinese developers have reached $1.17 billion so far in 2014, compared with $9.8 billion for all of last year, Thomson Reuters LPC data shows. Demonstrating the change in investor sentiment, bonds issued by Kaisa Group in January with a yield of 8.58 percent are now yielding 9.5 percent. The company did not immediately respond to a request for comment.

 

Times Property issued a 5-year bond this month, not callable for 3 years, to yield 12.825 percent. A similar instrument from China Aoyuan Property in January was priced at 11.45 percent. Both Kaisa and Times are in the B-rating “junk” category, which is four notches above a default rating.

 

Property prices on the whole are still rising, but there are signs of stress in second and third tier cities. Early indications of property sales in March, traditionally a high season, were not promising, although final figures for the month would not be available until April, said Agnes Wong, property analyst with Nomura in Hong Kong. That may mean developers have to cut prices and investor sentiment may worsen.

 

“This is hurting the cash flows of the smaller players,” she said.

 

The market stresses ultimately could lead to the reshaping of the property development sector, said Kenneth Hoi, chief executive of Powerlong Real Estate Holdings Ltd (1238.HK), a mid-sized commercial developer.

 

“In the future, only the top 50 will be able to survive,” he said during a briefing on the company’s earnings on March 13. “Many small ones will exit from the market.”

The fun is about to start.

via Zero Hedge http://ift.tt/NWyMIl Tyler Durden

A Turkish court has ruled against Prime Minister Erdogan's unilateral decision to ban Twitter from the nation after the threatened leak of corruption allegations. As The FT reports, the Ankara district court imposed a stay on the measure after hearing arguments from the Turkish Bar Association that the ban was disproportionate and illegal. While government officials have agreed they would implement the court's ruling, so far there has been no change. Twitter has officially responded expressing concern at the ban and filing further petitions to have it lifted as rumors spread of a "spectacular leak" in the next few days ahead of Sunday's elections.

 

As The FT notes,

A Turkish court has ruled against the country’s ban on Twitter, which has attracted widespread international condemnation, in the last heated days before nationwide elections.

 

The Ankara district court imposed a stay on the measure after hearing arguments from the Turkish Bar Association that the ban was disproportionate and illegal. The US State Department has described the block as the 21st century equivalent of book burning while the UN High Commission for Human Rights this week became the latest in a series of international bodies to call for the lifting of the ban.

 

…

 

Bulent Arinc, Turkey’s deputy prime minister, said the government would implement the court’s ruling, but did not specify when. Meanwhile, both the country’s constitutional court and the Telecommunications Authority, the body that formally imposed the measure, were due to discuss the ban today.

 

As of Wednesday afternoon, Twitter was only accessible in Turkey for those using technical workarounds such as virtual private networks.

 

…

 

While it was initially depicted as the result of court orders, Recep Tayyip Erdogan, Turkish prime minister, has acknowledged that it was his decision to institute the ban.

 

Following a series of leaks spread on the microblogging platform circulating corruption allegations against Mr Erdogan and his government, the prime minister described Twitter as a threat to national security. The prime minister has also denounced some of the leaks as fabrications.

 

…

 

Many lawyers say the government is paying little attention to the rule of law, with the governing AK party also disregarding a recent ban on an election advertisement that used national symbols for party political reasons. Mr Erdogan said he would “ban the ban”.

There are also a number of rumors of more leaks ahead of the elections:

Further leaks have been expected on Twitter and other social media platforms ahead of local elections on Sunday that Mr Erdogan has depicted as a referendum on his rule and a riposte to the movement of Fethullah Gulen, a former ally the prime minister blames for both the leaks and the corruption inquiry.

 

But one of the anonymous Twitter users who spread the allegations said that rumours that a spectacular leak was planned for March 25 were unfounded.

But Twitter has also responded:

• *TWITTER SAYS IT FILED PETITIONS IN TURKEY TO HAVE BAN LIFTED
• *TWITTER SAYS IT'S ENGAGED WITH TURKISH AUTHORITIES ABOUT BAN
• *TWITTER SAYS 2 ORDERS RELATE TO ALREADY PROHIBITED CONTENT
• *TWITTER SAYS CONCERNED ABOUT REQUEST TO BAN TURKEY GRAFT LEAKER

 

Via their blog,

 

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By Paul Mylchreest of Monument Securities

A critical juncture

Over the course of the last century, the US Congress has been blamed for much that has gone wrong in international relations. The unwillingness of Congressional leaders in 1919 to support US participation in the League of Nations doomed from the outset that quixotic attempt to put global relations on a rational basis. Renewed world war was the eventual outcome. Then in 1930, Congressional passage of the Tariff Act, widely known as Smoot-Hawley, marked the break-out of beggar-thy-neighbour trade practices that no less an authority on that period than Mr Bernanke has maintained contributed to the length and depth of the global depression. It is no matter that some historians argue that Smoot-Hawley merely built on the Fordney-McCumber Tariff Act of 1922; that had been Congress’s doing as well. More recently, the US Congress has resisted presidential demands for ‘fast-track’ authority to tie up international trade deals. The lack of faith of the USA’s counterparties in Washington’s ability to ratify trade agreements was an important factor in the collapse of the Doha Round, which has put a brake on the development of the World Trade Organisation. Now, the US Congress is acting in a way which could have consequences at least as serious as those that followed these past examples of obduracy.

This week the US Congress is considering a bill to provide financial aid to Ukraine. President Obama had appended clauses to this bill to ratify the IMF’s 2010 decision to increase the quotas, and hence voting power, of emerging countries, chiefly at the expense of European members, and to boost the IMF’s capacity to lend. The USA enjoys a blocking minority in IMF decision-making under current quotas, and would continue to do so after the changes; it is essential, therefore, that US ratification be secured if the reform is to go ahead. However, many members of the US Congress, especially on the Republican side, are suspicious of the IMF and its activities. Specifically, that element of the reform package which would convert countries’ temporary lending to the IMF during the global financial crisis into a permanent increase in IMF resources has roused fierce opposition. For more than three years, congressional leaders have thought better of exacerbating party tensions by bringing forward proposals to approve the IMF changes. However, the G20 meeting in February ‘deeply regretted’ that the reform was still held up and urged the USA to ratify ‘before our next meeting in April’. Mr Siluanov, Russia’s finance minister, then suggested that the IMF should move ahead with the reforms without US approval, a suggestion sympathetically received by other BRICS leaders but which would threaten to split the IMF. Mr Obama’s concern to avoid this outcome is understandable and he has argued that, since the IMF will play the lead role in supporting Ukraine’s economy, approval of the new quotas is relevant to the Ukraine legislation. All the same, Mr Reid, the Democrat Majority Leader in the Senate, yesterday stripped the IMF provisions from the text, taking the view that the bill would be given a rough ride through the Senate and no chance of passage through the House of Representatives if it retained them. It now seems unlikely that the USA will complete (or, indeed, begin) legislative action on the IMF reform by the 10 April deadline the BRICS have set. The odds are moving in favour of a showdown at the G20 finance ministers’ and central bank governors’ meeting due in Washington on that date.

International discord over Ukraine does not bode well for the settlement of differences over the IMF’s future. Though the G7 is excluding Russia from its number, in retaliation for its action in Crimea, this does not amount to isolating Russia. There has been no suggestion that Russia be excluded from the G20. The USA and its allies have suspected that several other G20 members would not stand for it. This suspicion was confirmed yesterday when the BRICS foreign ministers, assembled at the international conference in The Hague, issued a statement condemning ‘the escalation of hostile language, sanctions and counter-sanctions’. They affirmed that the custodianship of the G20 belongs to all member-states equally and no one member-state can unilaterally determine its nature and character. In short, their statement read like a manifesto for a pluralist world in which no one nation, bloc or set of values would predominate.

Meanwhile, Mr Obama has also been active at The Hague fostering warmer relations between South Korea and Japan. His aim seems to be to contain China’s expansionism in the Asian region. But US worries in this regard may be exaggerated to judge by a recent article in the PLA Daily, the official media outlet of China’s military. This urged China’s leaders to study the history of the 1894-95 war with Japan, which China lost decisively despite being at least as well equipped. The concern in Beijing seems to be that problems of corruption and nepotism in the PLA today are no less serious than they were in China’s forces in 1894. That may well deter China from taking military action. However, to the extent that China lacks confidence to use military force, it may be all the more intent on wielding financial weapons in pursuing its geopolitical aims. Beijing  leaders have long dreamt of displacing, or at least dethroning, the US dollar from its reserve currency role. US dominance of the IMF is one of several effective bars to the achievement of such a goal. The kind of action Russia is advocating, the BRICS wresting control of the IMF in despite of US veto power, might have some appeal. That would mark the end of the unified global monetary system that has developed since the IMF was founded in 1945, to be replaced by a bloc of fiat currencies in the developed countries and a system in the emerging sector where currencies were linked to drawing rights in some new international fund, possibly with some material backing. It seems unlikely that convertibility between these monetary systems could be maintained for long. Consequently, the 10 April meeting is shaping up as a potentially critical juncture in world economic history.

via Zero Hedge http://ift.tt/1iBVRLK Tyler Durden

The credit cycle is called a "cycle" because, unlike the business cycle (which the Fed has convinced investors no longer exists), it 'cycles'. At some point the re-leveraging of the balance sheet – remember more cash on the balance sheet but even morerer debt (as we noted here) – requires risk premia that outweigh even the biggest avalanche of yield-chasing free money. It appears, as Bloomberg's James Crombie notes, that point may be approaching as yield premiums for U.S. distressed debt hit a five-year high on March 25, according to Bank of America Merrill Lynch.

 

h/t @jtcrombie

BAML’s distressed debt index was at a spread of 2,483 basis points — the highest level since March 18, 2009 when it was at a spread of 2,609 basis points.

Of course we have explained this won't end well…

 

 

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.

 

Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

 

 

This won't end well…

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The King is dead… long live the QEeen?

 

 

h/t @RudyHavenstein and @KelitoMaximus

via Zero Hedge http://ift.tt/QhspRP Tyler Durden

The markets are speculating that Vladimir Putin will have to set up some form of capital control in order to stem the flight of capital from his country. It was already happening before the crisis in Ukraine and the annexation of Crimea. But, now it is set to get worse and an estimated $70 billion is the figure that is being mentioned. That is far higher than had previously been expected.

The G7 suspended Russia from the G8 and is considering complete expulsion (on the say-so of the UK’s David Cameron) from the group of nations (Canada, France, Germany, Italy, Japan, UK, USA), during aMarch 24th 2014 special summit in The Hague. That’s all despite the fact that Russian media is now reporting that the G7 suspended themselves and Russia is left in the G8 on its own. It’s a little like the British that had headlines running that shock, horror, the ‘Continent was cut off from the British Isles by thick fog’. All depends where you believe you are. The Russians are at the center of their universe, obviously. Russia was part of the G8 between 1998 and 2014.

Russian Foreign Minister Sergei Lavrov stated: “If our Western partners believe the format has exhausted itself, we don’t cling to this format.”

So, what does Putin have to lose now? The ground has been prepared for a war in which Putin has nothing less to lose than his own power or ego being jolted a little. If he sits back and does nothing now that the G8 has become the G7 and Russia has been excluded (from one of the very few moments that the West actually communicates with Russia), then he will suffer the public consequences and humiliation of the Western world.

The West believes that is can draw a line under the annexation of Crimea, that it should tell Putin to stop there and all will be accepted as it is. But, Putin’s point is that Russia has been humiliated for decades by the West. The West has constantly treated the Russian Federation as a backward, Soviet-era country in which the people drank vodka all day and ate pelminis (that’s when the state was able to hand them out after queuing for three hours to get a slice of bread at a state shop). There might be many drawbacks to Russia where the people don’t quite do things the way of the Western world. Yes, they have lack of freedom of the press and yes there is an omnipresent state and a dictatorial leader. Although, the sole difference is the fact that Russia doesn’t pretend to be magnanimous and caring for anything but international power. The difference is that Western leaders do pretend (sometimes).

By taking away the privilege (if we can call it that) of sitting around a table with the other members of the G8, this will only exacerbate Putin’s feeling of humiliation. He will not stand for it. He will not accept it and he is so far in now that he cannot back down. The West is willing to wound Russia, but fears striking them since they are wary of the volatility of Putin as leader of a country with a damaged ego. Why at the present time, in the present predicament of the financial crisis with Greece in debt for generations, the French failing to do anything of any economic worth and the British threatening to leave the EU, would you wish for one moment to expand it by adding Ukraine into the already-failing union? Doing so, could have only had one result: causing the ire of Moscow. By going to Kiev in the beginning to defend the rights of anti-Russian and pro-European crowds, the US and the EU could only bring about egg being splattered on their faces. That, from the start was a case of nigh-on interference in the domestic affairs of another nation. What happened to the notions of state-sovereignty and self-determination? The US and the EU should never have publically got involved and should have stayed with using diplomatic channels.

Capital controls will only hinder economic progress in Russia, but what are the other alternatives to putting an end to the flight of capital from the country? Using legislation or volume restrictions will only send the message to the world that the Russian economy is still developing and is not worthy of investment. Capital controls won’t be used just yet and capital outflows will have to get to a worse point before that happens. Russia’s current account is preparing to get into a deficit and imports will outweigh exports. The amount of outflows from Russia is nothing today for the moment compared with the financial crisis and the $150 million that left the country every single quarter.

It would be a brave investor or one with fortuitous insight to take the step to invest in Russia today. Russian stock was already running on the cheap side before the sanctions imposed by the West. Markets have no possibility of dealing with the geopolitical risk involved in Russia. Earnings per share (EPS) have already been cut by analysts who predict a drop of 8.5%. That could increase to at least 62% which was being experienced in 2008-2009.

For the moment, Russia is playing it icily cold and decidedly Siberian. But, that is probably proof that something is going to happen. Putin will not be able to sit back and watch his suspension from the herd of the rich boys in The Hague yesterday, not without showing them he’s the boss (at least where he comes from).

Originally posted: Russia: Capital Controls?

 

via Zero Hedge http://ift.tt/1jwrLg8 Pivotfarm