Is It Time for Eurozone Banks to Start Worrying About Turkey Again?

Link:https://www.nakedcapitalism.com/2021/11/is-it-time-for-european-banks-to-start-worrying-about-turkey-again.html

Excerpt:

At the height of the last big wave of Turkey’s ongoing crisis, in August 2018, the European Central Bank issued a warning about the potential impact the plummeting lira could have on Euro Area banks heavily exposed to Turkey’s economy via large amounts in loans — much of them in euros — through banks they acquired in Turkey. The central bank was worried that Turkish borrowers might not be hedged against the lira’s weakness and would begin to default on foreign currency loans, which accounted for 40% of the Turkish banking sector’s assets.

In the end, the contagion risks were largely contained. Many Turkish banks ended up agreeing to restructure the debts of their corporate clients, particularly the large ones. At the same time, the Erdogan government used state-owned lenders to bail out millions of cash-strapped consumers by restructuring their consumer loans, many of them foreign denominated, and credit card debt.  

But concerns are once again on the rise about European banks’ exposure to Turkey. On Friday, as those concerns commingled with fears about the potential threat posed by the new omicron variant of Covid-19, Europe’s worst-affected stocks included the four banks most exposed to Turkey: Spain’s BBVA, whose shares fell 7.3% on the day, Italy’s Unicredit (-6.9%), France’s BNP Paribas (-5.9%) and the Dutch ING (-7.3%).

Author(s): Nick Corbishley

Publication Date: 30 Nov 2021

Publication Site: naked capitalism

OFR 2021 ANNUAL REPORT TO CONGRESS

Link:https://www.financialresearch.gov/annual-reports/2021-annual-report/

Full report link: https://www.financialresearch.gov/annual-reports/files/OFR-Annual-Report-2021.pdf

Graphic:

Excerpt:

Office vacancy rates have
risen modestly to 18.3%
(see Figure 8). However,
actual office usage has
declined much more as the
work-from-home response
to the pandemic became
widespread. This decline
has had limited financial
impact to date because
office rentals are usually
held in multiyear leases
with credit-worthy tenants
(see Figure 9). However,
there is considerable uncertainty about whether and
how demand for office
space will change over the
long run.

Author(s): Office of Financial Research

Publication Date: 17 Nov 2021

Publication Site: Office of Financial Research, Treasury Department

Insurance Companies and the Growth of Corporate Loan Securitization

Link:https://libertystreeteconomics.newyorkfed.org/2021/10/insurance-companies-and-the-growth-of-corporate-loan-securitization/

Graphic:

Excerpt:

The rating-based mapping was partially altered in 2010, when the NAIC enacted a regulatory change that essentially allowed insurance companies to report CLO tranches that were purchased at a discount, or highly impaired, in a lower NAIC category than that implied by the rating-based mapping. The new capital regime for CLO investments likely increased insurance companies’ incentives to invest in higher-yielding CLO tranches.

The following chart presents some evidence consistent with reach-for-yield behavior, particularly since the regulatory reforms of 2010. The left panel shows the time series of insurers’ new CLO holdings falling into the NAIC 1 designation as a percentage of the total volume outstanding of these tranches based on percentiles of the distribution of CLOs yields for each year. As expected, there is a clear preference for the riskiest tranches within NAIC 1 (those with yields above the 66th percentile) throughout the sample period, with the exception of the financial crisis, when all yields are squeezed at their minimum levels. Interestingly, the market shares of CLO tranches with yields above the 33rd percentile experience a sharp increase in the two years following the 2010 regulatory reform, then register a significant drop in 2019, when the reform was repealed. We do not find similar evidence in insurance companies’ corporate bond investments (right panel).

Author(s): Fulvia Fringuellotti, João A. C. Santos

Publication Date: 13 Oct 2021

Publication Site: Federal Reserve Bank of New York

Yellen Is Wrong. The US Government Doesn’t Always Pay its Debts.

Link: https://mises.org/wire/yellen-wrong-us-government-doesnt-always-pay-its-debts

Excerpt:

In 1934, the United States defaulted on the fourth Liberty Bond. The contracts between debtor and creditor on these bonds was clear. The bonds were to be payable in gold. This presented a big problem for the US, which was facing big debts into the 1930s after the First World War.

….

So how did the US government deal with this? Chamberlain notes “Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Americans.”

Moreover, with the Gold Reserve Act of 1934, Congress devalued the dollar from $20.67 per ounce to $35 per ounce—a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

The US offered to pay its creditors in paper dollars, but only in new, devalued dollars.1 This constituted default on these Liberty Bonds, since, as the Supreme Court noted in Perry v. United States, Congress had “regulated the value of money so as to invalidate the obligations which the Government had theretofore issued in the exercise of the power to borrow money on the credit of the United States.”

This was clearly not a case of the US making good on its debt obligations, and to claim this is not default requires the sort of hairsplitting that only the most credulous Beltway insider could embrace.

Author(s): Ryan McMaken

Publication Date: 28 Sept 2021

Publication Site: Mises Wire

QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT: 2021Q2

Link: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2021Q2.pdf

Graphic:

Excerpt:

Aggregate household debt balances increased by $313 billion in the second quarter of 2021, a 2.1% rise from 2021Q1, and
now stand at $14.96 trillion. Balances are $812 billion higher than at the end of 2019 and $691 billion higher than 2020Q2. The 2.1%
increase in aggregate balances was the largest seen since 2013Q4 and marked the largest nominal increase in debt balances since
2007Q2.

Publication Date: August 2021

Publication Site: NY Fed

HOUSEHOLD DEBT AND CREDIT REPORT (Q2 2021)

Link: https://www.newyorkfed.org/microeconomics/hhdc.html

Graphic:

Excerpt:

Total Household Debt Climbs Boosted by Growth in Mortgages and Auto Loans

According to the latest Quarterly Report on Household Debt and Credit, total household debt rose by $313 billion (2.1 percent) to reach $14.96 trillion in the second quarter of 2021. Mortgage balances—the largest component of household debt—rose by $282 billion and auto loans increased by $33 billion. Credit card balances ticked up by $17 billion while student loan debt decreased by $14 billion. Mortgage originations, which include mortgage refinances, reached $1.2 trillion, surpassing the volumes seen in the preceding three quarters. Auto loan originations, which include both loans and leases, reached a record $202 billion.

Publication Date: Accessed 22 Sept 2021

Publication Site: NY Fed

Huge Credit Stress Starting in China May Easily Rock the Whole World

Link: https://mishtalk.com/economics/huge-credit-stress-starting-in-china-may-easily-rock-the-whole-world

Graphic:

Excerpt:

If funding stress signs don’t emerge, don’t conclude that there is no contagion. Contagion is playing out already if you know where to look.”

The mess in China does not stop with Evergrande. 

…..

Everglade shows the theft of wealth and money in a giant Ponzi scheme, not to be confused with real savings (i.e. net tangible assets at true market value)!

There is no savings glut. 

The alleged savings glut is nothing but a fiat Ponzi scheme where central banks have to keep money supply soaring to keep asset prices (based on debt) from imploding!

How much longer this setup can continue before it blows up in a currency crisis, war with China, or some other major economic disruption remains a key mystery.

Author(s): Mike Shedlock

Publication Date: 20 Sept 2021

Publication Site: MishTalk

How Beijing’s Debt Clampdown Shook the Foundation of a Real-Estate Colossus

Link: https://www.wsj.com/articles/how-beijings-debt-clampdown-shook-the-foundation-of-a-real-estate-colossus-11631957400

Graphic:

Excerpt:

The party has ended. Years of aggressive borrowing have collided with Beijing’s crackdown on debt, leaving the developer on the brink of collapse. Construction of Evergrande’s projects in many cities has stopped. The company has faced a litany of complaints and protests from suppliers, small investors and home buyers who sank their savings into properties the company promised to deliver.

Cash is so short that this summer, the developer said it began paying bills to contractors and suppliers with unfinished apartments instead of actual money. A paint supplier based in the southeastern province of Fujian said Evergrande recently paid off the equivalent of $34 million in bills with three unfinished properties, which the supplier is trying to sell. At a construction firm in Wuhan, more than 200 employees have been forced to take pay cuts because some of Evergrande’s bills are past due, a manager at the firm said,

Former and current employees say layoffs are adding up, and free meals that Evergrande used to provide for staffers at its headquarters have been canceled. In central China’s Hubei province, Evergrande has asked the local government to take over homeowners’ funds held in escrow accounts so they can’t be seized in legal disputes with creditors, according to people familiar with the matter.

Evergrande didn’t respond to requests for comment. The company said on Sept. 14 that its apartment sales have slowed markedly since June, its asset-disposal plans haven’t materialized, and it has hired financial advisers — a move that brings it closer to a potential debt restructuring.

Author(s): Xie Yu and Elaine Yu

Publication Date: 18 Sept 2021

Publication Site: WSJ

China Property Fear Spreads Beyond Evergrande, Roiling Markets

Link: https://finance.yahoo.com/news/hong-kong-stocks-sink-evergrande-023055601.html

Graphic:

Excerpt:

Growing investor angst about China’s real estate crackdown rippled through markets on Monday, adding pressure on Xi Jinping’s government to prevent financial contagion from destabilizing the world’s second-largest economy.

Hong Kong real estate giants including Henderson Land Development Co. suffered the biggest selloff in more than a year as traders speculated China will extend its property clampdown to the financial hub. Intensifying concerns about China Evergrande Group’s debt crisis dragged down everything from bank stocks to Ping An Insurance Group Co. and high-yield dollar bonds. One little-known Chinese property developer plunged 87% before shares were halted.

Hong Kong’s benchmark Hang Seng Index slumped 3.3%, its biggest loss since late July. The selling also spilled over into the Hong Kong dollar, offshore yuan and S&P 500 Index futures. Holiday closures in much of Asia may have exacerbated the volatility, traders said.

…..

“The repercussions from Evergrande’s prospective collapse will likely contribute to China’s ongoing economic deceleration, which in turn anchors global growth and inflation, and casts a pall over commodity prices,” wrote analysts led by Phoenix Kalen, head of emerging-market strategy in London.

Author(s): Catherine Ngai and Ishika Mookerjee

Publication Date: 20 September 2021

Publication Site: Yahoo Finance

Libor Transition Stokes Sales of Risky Corporate Debt

Link: https://www.wsj.com/articles/libor-transition-stokes-sales-of-risky-corporate-debt-11631451601

Excerpt:

Managers of collateralized loan obligations — securities made up of bundled loans with junk credit ratings — are rushing to close deals ahead of the year-end move away from the London interbank offered rate. The interest-rate benchmark underpins trillions of dollars of financial contracts but was scheduled for phaseout after a manipulation scandal.

That is helping push CLO sales to records. U.S. issuance topped $19.2 billion in August, a monthly record in data going back a decade, according to S&P Global Market Intelligence’s LCD.

…..

A wave of CLO refinancings this year allowed some managers to include fallback language shifting to SOFR in their documents, analysts said. But for other deals, CLO managers and investors must negotiate that changeover, which could create conflicts if they have different rate preferences.

Disruptions to the transition could increase the extra yield, or spread, that investors’ demand to hold triple-A rated CLO debt during the fourth quarter of this year, depending on how quickly the loan market transitions and how new CLO deals and investors position themselves, said Citi analysts in a June note.

SOFR is based on the cost of transactions in the market for overnight repurchase agreements, where large banks and hedge funds borrow or lend to one another using U.S. Treasurys as collateral. Unlike Libor, which tends to rise during periods of market stress, it doesn’t adjust for shifts in credit.

During last year’s spring selloff, the difference between three-month Libor and SOFR rose to 1.4 percentage points at its peak, according to BofA. That means CLO debtholders received a higher rate than what they would have if their bonds were linked to SOFR.

Author(s): Sebastian Pellejero

Publication Date: 12 September 2021

Publication Site: Wall Street Journal

U.S. Insurance Industry’s High-Yield Bond Exposure Grows Following COVID-19-Related Credit Deterioration in 2020

Link: https://content.naic.org/sites/default/files/capital-markets-special-report-covid-related-credit-deterioration.pdf

Graphic:

Excerpt:

At year-end 2020, the U.S. insurance industry reported $286 billion in high-yield bond exposure,
an increase of just over 25% compared to year-end 2019 due in part to the broad-based credit
impact of the COVID-19 pandemic.

High-yield bonds accounted for 6.1% of the industry’s total bond exposure, the highest level in
more than 10 years and an increase from 5.1% at year-end 2019.

High-yield corporate bonds, asset-backed securities (ABS) and other structured securities, and
private-label commercial mortgage-backed securities (CMBS) were the primary contributors to
the increase in high-yield exposure.

Author(s): Michele Wong and Jean-Baptiste Carelus

Publication Date: 6 August 2021

Publication Site: NAIC, Capital Markets Special Report

China’s Corporate Crackdown Adds to Junk-Bond Distress

Link: https://www.wsj.com/articles/chinas-corporate-crackdown-adds-to-junk-bond-distress-11629019801?mod=e2tw

Excerpt:

The latest Chinese market to buckle under pressure from Beijing’s wide-ranging corporate crackdown: junk bonds.

Companies from China make up the bulk of Asia’s roughly $300 billion high-yield dollar bond market, thanks to a surge in borrowing by the country’s heavily indebted property developers.

But the investor optimism that drove that borrowing has collapsed.

…..

The widening regulatory crackdown that sparked a big selloff last month in the shares of internet-technology and education companies has also weighed on Chinese credit markets, pushing down prices of even investment-grade bonds.

The moves show China is getting more serious about reining in companies whose business practices are seen at odds with national priorities. Investors are now actively looking for sectors that might be next in the crosshairs.

Author(s): Serena Ng

Publication Date: 15 August 2021

Publication Site: Wall Street Journal