Tag Archives: Balance sheet

El-Erian On Markets Balance Solvency, Growth and Liquidity

Another week has passed by and more ugly signs of how deep our economic troubles are have emerged. The only thing that keeps our financial house of cards from collapsing is the endless stream of money coming from the central banks – primary the US Federal Reserve and the European Central Bank (ECB). But doubts about the final outcome still persist.

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity.”

Mohamed El-Erian 

In spite of the massive injection of money into the financial system by the central banks, key economic indicators continue to disappoint.  And by now, the central banks have painted themselves into a corner where there’s little else to do. The global economy is practically in state of stagnation – the next stage is depression…

Mohamad El-Erian at PIMCO is one of the top leaders who have managed to keep his cool and not lose his head throughout this whole mess so far.

He openly admits he does not have all the answers, but as usually he points to some key factors that we all should be aware of.

Here’s his latest commentary, as published by CNBC today:

“The health of the global economy, and that of markets, depends on the success of a series of medium-term handoffs between the public and private sectors – in growth, balance sheets and credit flows. This week’s data highlighted their complexity. Fortunately for investors, the valuation impact is being compensated by central banks‘ wide open liquidity spigots,” El-Erian writes.

And continues:

To counter disorderly private sector de-levering and avoid an economic depression, governments and central banks around the world have aggressively ballooned their balance sheets.

This has helped heal some private balance sheets but job creation has remained very anemic, income inequality has increased, and growth has been too weak to allow for the de-levering of the public sector (including fiscal deficits and central balance sheets which now vary in size from 20% of GDP in the US to 30% in Europe).

In the US, Friday’s disappointing GDP print for the fourth quarter was a reminder of the challenge, especially in view of a less-than-reassuring composition.

Consumer growth was limited to just 2% notwithstanding yet another decline in the savings rate to 3.7%, a level last seen at the end of 2007. Export growth also decelerated. Indeed, were it not for a surge in inventory, the economy would have probably succumbed to the drag from government components.

The extent of the growth challenge in Europe was highlighted by Friday’s higher than expected increase in Spanish unemployment (to an agonizing 22.9%).

Meanwhile several of the region’s governments, ECB, IMF and private creditors continued to squabble about how to allocate the inevitable losses on Greek debt.

In Portugal, another highly vulnerable economy, market measures of default risk reached record highs this week.

The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region’s debt crisis.

Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.

Read the full post at CNBC.

Related by econoTwist’s:


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Rosenberg Says US Virtually Certain To Fall Back Into Recession

The US economy is almost certainly headed back into a double dip recession, and economists aren’t seeing it because they’re using “the old rules of thumb” that don’t apply this time, well-known economist David Rosenberg tells CNBC.

“The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now,” he says.

“I think that it’s almost a foregone conclusion, a virtual certainty.”

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Another Day Older And Deeper In Debt

We continue to receive Wall Street research telling us to overweight stocks and underweight bonds. This does not happen at true fundamental bottoms in equity prices and Treasury yields.

I continue to get asked what will turn me more bullish. This doesn’t happen at lows, either. At the true lows, the bears get asked why they’re not even more bearish. At the lows, people threaten to call the police when equity brokers go cold-calling.

What the bulls still refuse to see is that we are in an entirely new paradigm and that the old rules of thumb are rarely, or are ever going to be able to be relied upon, as was the case in the familiar credit-expansion days of yore.

There is simply too much debt overhanging the U.S. household balance sheet — the largest balance sheet on the planet. And, despite the deleveraging efforts to date, the process of balance sheet repair is still in its infancy.

Consider the facts — these are not opinions:

The aggregated household debt-income ratio peaked in Q1 2008 at 136%. Currently, this ratio is at 126%. But the pre-bubble norm was 70% (no wonder 25% of Americans have a sub-600 FICO score). To get down to this normalized ratio again, debt would have to be reduced by around $6 trillion. So far, nearly $600 billion of bad household debt has been destroyed. In other words, we have much further to go in this deleveraging phase. Maybe this is why the McKinsey report concluded that this process can and often takes up to seven years to complete.

Folks, we are in this for the long haul. It’s not too late to enter the acceptance stage.

What about debt in relation to household assets? That debt-to-asset ratio is currently at 20% (the peak was 22.7% set back in Q1 2009) but again, the pre-bubble norm was 12.5%. The implications: classic Bob Farrell mean-reversion would mean a further $7 trillion of debt extinguishment.

We are a long way off this deleveraging phase from running its course. The government, along with the Federal Reserve, have expended tremendous resources to cushion the blow. But now we see first-hand what happens when policy stimulus fades and a mini-inventory cycle peaks out in a credit contraction: stagnation in Q3 followed by renewed economic contraction in Q4.

Play it safe. As in … safe yield.

Here’s a copy of the latest market commentary/analysis from chief economist David Rosenberg at Gluskin Sheff.


IMACS is a non-profit organization dedicated to helping families avoid foreclosure by assisting them in the modification of their mortgage to lower their monthly payments.

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East European banks needs $304bn

In the Baltic region the banks are currently using more money than they  earn. According to Fitch Ratings the 12 banking systems that operates in Eastern Europe will need a capital injection of USD 304 billions in 2009 and 2010. About 20% of the banks risky loans have been restructured and masked in their off-balance sheets.

“Given significant levels of restructured loans, which do not feature in NPL numbers, and growing reliance on collateral, particularly in property, sizeable losses will be incurred.”

Fitch Ratings

(Aticle in Norwegian, quotes and links to sources in English)

– Driftsinntektene til bankene i de baltiske landene er fullstendig spist opp av de høye risikokostnadene i første halvår 2009, skriver Fitch Ratings i en fersk analyse av 12 banksystemer i de fremvoksende europeiske økonomiene.

Deriblant Estland, Latvia, Litauen og Polen. Og Baltikum blir viet spesielt stor oppmerksomhet.

Det betyr at de baltiske bankene egentlig er insolvente – kostnadene er større enn inntektene.

– Det kraftige fallet i BNP-veksten i området ser ikke ut til å være filtrert gjennom til bankenes (pre-provision) inntekter, skriver ratingbyrået.

“Costs of risk, however, vary significantly, with operating profits in the Baltic states being completely eroded in 6M09, whereas other banking systems still have some buffer to absorb markedly higher credit costs.”

Spår kjempesmell

Veksten i misligholdte lån vil nå toppen i 2010, dersom ikke noen uventet skjer, tror Fitch.

Samtidig vil verdiene som lånene er sikret i (for eksempel boliger) falle ytterligere, og finansieringskostnadene stige.

Betydelige tap vil oppstå, ifølge analysen.

“The agency anticipates a continued inflow of non‐performing loans (NPLs) albeit at a slowing rate, with NPLs peaking in 2010 – provided that the operating environment does not deteriorate. Given significant levels of restructured loans, which do not feature in NPL numbers, and growing reliance on collateral, particularly in property, sizeable losses will be incurred.”

20% “skjulte” lån

Den kraftige veksten i NPL (ikke-lønnsomme lån) utgjør en helserisko for det baltiske bankvesenet fordi det reduserer deres utlånsevne.

Men Fitch er mest bekymret for den økende restruktureringen av lån, som i prakis er “off-balance”-finansiering som det ikke føres detaljer om i regnskapene.

“Concerns also exist over the current high level of restructured loans in some of the banking systems, as restructuring efforts can mask deterioration of underlying asset quality. The comparability of cross-country asset quality data is limited – despite the implementation of IFRS.”

“Cross-country comparisons of loan impairments to problem loans are difficult, due to differences in disclosure and in the regulatory regimes applied in measuring impairment charges. Bearing in mind these caveats, Fitch believes that the data on NPLs indicate general asset quality trends and also the speed with which loan quality has deteriorated in the region.”

“Fitch considers the sizeable increase in NPLs as a threat to the health of banking systems, as NPLs restrain banks’ ability to lend. The parameters governing which loans can be restructured, and how, give banks some leeway in selecting the loans for restructuring so that the extent of the deterioration in asset quality may not be fully transparent.”

Ratingbyrået har kommet frem til at de enkelte bankene i gjennomsnitt har restrukturet 20 prosent av sine utlånsporteføljer, slik at kvaliteten (sikkerheten) på disse ikke kan vurderes.

“NPL ratios reached double-digit percentages in Latvia, Lithuania and Romania. However, as stated above, a more realistic assessment of asset quality would also include the proportions of restructured loans, which are not consistently available. On an individual bank level in certain markets, Fitch has been informed that restructured loans can account for up to 20% of a bank’s loan book.”

“In order to restore confidence in the banking systems and speed up the economic recovery process, banks will need to clean up their balance sheets and crystallise credit losses.”

Trenger 1800 milliarder

Beregninger som Fitch har gjort viser et mengden av “net impaired loans” (nedsatte lån), det vil si lån som ikke betjenes i henhold til avtale, utgjør rundt 75 prosent kapitalbasen i de latviske bankene, og cirka 45 prosent i Litauen.

Fitch Ratings anslår at bankene i de 12 fremvoksene europeiske økonomiene vil ha et samlet kapitalbehov på 304 milliarder dollar i 2009 og 2010. ( 1798 milliarder kroner).

Det største behovet er i Baltikum, nærmere bestemt Latvia og Litauen hvor DnB NORD er henholdsvis fjerde og tredje største bank.

DnB NORD er tilført 15 milliarder kroner i ny kapital så langt i år,

Fitch mener det er tvilsomt at de utenlandske eierne av bankene i utkant-europa vil la dem gå konkurs, og tror de vil benytte seg av andre muligheter – deriblant droppe aksjeutbytte – for å sikre sine “døtre” i Sør- og Øst- Europa.

– Konsekvensen blir trolig heller at moderbankene må gå ut av forretninger som ikke tilhører kjernevirksomheten i forbindelse med restruktureringsprosessen, skriver kredittvurderingsbyrået.

“As the general economic outlook remains challenging, Fitch considers it likely that several banking systems will make no dividend payments to their parents for the financial year end‐2009 to improve capital.”

Skyhøy risiko

Ratingbyrået understreker også at det er en meget stor risiko knyttet til den økonomiske utviklingen i de omtalte land.

Fitch trekker blant annet frem:

* Store lån i utenlandsk valuta – som regel usikret (unhedged).

* Videre fall i lånenes underliggende verdier (spesielt næringseiendom)

* Devaluering av valuta

* Tillitskollaps i et eller flere av banksystemene.

* Sosial og politisk uro som følge av de økonomiske forholdene.

Her er hele rapporten fra Fitch Ratings.

DnB NOR opplyser i sin siste kvartalsrapport at DnB NORD som opererer i området (men registrert i Danmark) har en samlet låneportefølje i de tre baltiske statene, samt Polen, på 78,5 milliarder kroner.

DnB NORs Q3-rapport finner du her.

DnB NORD Banka (Baltikum) Q3 Financial Statement

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