Prowling Bond Vigilantes Should Stress Out Big U.S. Banks

Banks are notoriously complex. But in one respect, they are pretty simple; like other companies, banks depend on access to a raw material to build products and need to purchase it at a price that allows them to generate a profit.

For banks, that raw material is money. Whether banks can persuade credit investors to provide it comes down to confidence and capital. And as the European crisis shows, doubts on either can mean suppliers charge too high a price or simply walk away.

That is worth remembering as the Federal Reserve prepares for another round of "stress tests" to determine whether some big U.S. firms can return capital to shareholders. The Fed last week said that it would require 31 banks to undergo tests early next year and that it will single out six firms—J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs Group and Morgan Stanley—for a separate exam that assumes a global credit crunch.

In doing so, the Fed will again grapple with the question of how much capital is enough. That is particularly tricky because the Fed wants banks to hold enough capital to absorb losses but also doesn't want to constrain lending and, thereby, economic growth. And the Fed faces an added dilemma. It has decided the economy is so fragile that extraordinary monetary-policy actions are appropriate and even more may be needed. That in itself argues against banks doing anything other than stockpiling capital.

For their part, banks argue that holding too much capital hampers credit creation. They also worry that holding more capital makes it tough to generate higher returns on equity, affecting valuations. As it is, the major U.S. banks have Tier 1 common ratios based on existing rules of between 8% and 11%, healthy levels.

Yet any doubt about capital sufficiency means banks can lose access to funding. That, too, can have adverse economic consequences. In a note Friday, analysts at Morgan Stanley argued that "bank funding is as big a brake on bank lending as bank capital." Banks that can't raise funds have to shrink their balance sheets.

So it is good the Fed's coming stress tests look stressful. In its worst-case scenarios, the Fed will ask banks to consider their capital buffers in the event unemployment hits 13% in early 2013, real gross domestic product shrinks almost 8% in the beginning of 2012, home prices fall another 20% between now and early 2014 and stock markets fall 50% over the next 12 months.

That strikes some as overkill. "The only adverse event the Fed left out is a direct asteroid strike on a major banking center," Karen Petrou of Federal Financial Analytics said in a report.

But the lack of investor confidence in banks justifies a harsh approach. Of the six biggest banks, none are trading above book value, and only Wells trades above tangible book. Given this, the Fed needs to be mindful of credit investors. Granted, the Fed has been able to print money without bond vigilantes exacting revenge. But the vigilantes are present in bank credit markets, as Europe's institutions know.



Even U.S. banks are feeling some heat. The price of insuring against default at the biggest institutions, for example, has jumped. Late last week, it cost about $474,000 to insure $10 million of Bank of America debt, compared with $157,000 in January, according to Markit. J.P. Morgan's 4.35% debt due August 2021, meanwhile, traded at a premium of about 2.79 percentage points to Treasurys last week, according to MarketAxess. That compared with a spread of about 1.7 percentage points at the end of August.

Clearly, the bond vigilantes are on the prowl. The Fed shouldn't do anything that spurs them to further action.

Source: http://online.wsj.com/article/SB10001424052970203764804577060581490016436.html

Ways to profit from ‘new normal’

As they pore over volatile economic forecasts for the years ahead, consulting firms, along with their clients, are seeking an answer to the crucial question: Is there money in the “new normal” and, if so, how and where can it be made?

The answer to the first part of the question is a straight “yes”.

The recession brought on by the acute financial crisis of 2008 also ushered in one of the toughest years in the sector’s history, as clients – particularly in developed countries – reached for the scissors, to shorten consultants’ mandates, trim costs, or cut or defer contracts.



In the UK, for example, 2009 was the first year in which the consulting sector’s revenues shrank.

But 2010 marked a comeback, precisely in some of the sectors – notably banking and financial services – that had pulled in their horns in the depths of the crisis.

Most of the top 10 global consulting practices showed strong growth in revenues in 2009-10, with PwC, KPMG and McKinsey up 9 or 10 per cent, as shown by figures from Kennedy Consulting Research & Advisory, a US-based industry analysis group.

At the same time, the crisis naturally forced changes on the multinational consultancies. They are seeking more revenue from fast-growing economies in Asia, Latin America and elsewhere; refocusing their work on the private sector in countries where government work has become scarcer; and improving the services provided.

What is clear is that there is no scope for complacency and whether consultants prosper or merely tread water will depend on how successfully they answer the second part of the opening question.

As recently as June this year, some consultants were hailing a “post-crisis environment”. But as the implications of confusion in the eurozone have spread beyond European borders, it has become clear this was a premature judgment.

Meanwhile, external regulation is back on the agenda, thanks to surprisingly radical proposals from Michel Barnier, European internal market commissioner, to ban big audit firms from offering consultancy services.

The official line from many consultants is that clients are again planning for expansion.

Customers are investing and planning for growth “for the first time since 2008 ... even within the context of uncertainty created by the eurozone crisis”, comments Andrew Hooke, chief operating officer of PA Consulting.

But the type of mandate available has permanently altered. Paul Gronwall, a senior analyst at Kennedy, says that among consultants and their customers “there is a growing expectation that economic cycles are shortening: the ups and downs are going to happen much quicker, so nobody’s going to put in place a five-year plan, because they’re lucky if they can see a year or two [ahead]”.

Alan Leaman, chief executive of the UK’s Management Consultancies Association, draws a comparison between the survey of its members in June 2010, when, despite the grim period they had just endured, they were bright about the future, and the association’s most recent study of firms.

“Now,” he says, “the numbers for the first half of 2011 look better than expected, but [members] are feeling a lot more nervous about the next six months.”

The uncertainty means the upsurge in demand for advice about how best to cut costs is unlikely to recede.

According to a recent survey of UK and global buyers of consultancy services, by Sourceforconsulting.com, nearly 40 per cent expect to spend more on advice about improving their operational efficiency over the next six months.

However, the efficiency drive may be combined with an uptick in demand for strategy advice. Raju Patel of Fulcrium, a specialist consultancy, acknowledging, that, in the medium-term, pure strategy is “a shrinking market”, says that “companies that have labelled themselves as strategy organisations have renewed or remodelled themselves and taken on market sectors they would not previously have considered”.

But it is usually at economic inflection-points that corporate customers look for strategy advice, often to validate tough decisions they may have to make anyway.

The difference in this cycle, industry observers and insiders agree, is that many companies now insist wise strategic counsel must come firmly attached to practical advice about how to implement it.

Here, the bigger consultancies, which can offer multiple consulting lines, may seem to have an edge, but as client demands become more complex, some believe the one-stop-shop firms will increasingly find themselves in partnership with specialists.

One area where change is slower coming, however, is the way in which consultancies are able to bill for their services. In spite of many firms’ desire to use a value-based fee approach (where firms are paid on the basis of the value created), clients are reluctant to move from more traditional billing models.

Consultants say defining what “value” looks like is one obstacle. Even if the trend towards value-based billing accelerates, only a few firms are big enough to put “skin in the game”, in the words of one, and take the risk of failing to pick up a fee at all.

Looking ahead, consultants expect 2011-12 to see continued strength in demand from sectors that rebounded from the depths of 2008, particularly those areas, such as financial services or healthcare, where a strong or changing regulatory framework drives business.

Sander van’t Noordende, group chief executive of Accenture’s management consulting business, picks out technology and emerging markets as the two biggest drivers of demand.

Companies are now grappling with how to apply new technologies in the front office, as well as the back, he says, and asking consultants how best to do it.

In markets such as China, India or Brazil, demand is increasingly “multidirectional”, coming from local companies seeking to expand abroad, rather than just multinationals seeking a foothold in a fast-growing region.

The consultancy offering itself goes both ways. Accenture has 70,000 employees in India – its largest country – but at the same time, according to Paul Friga, professor at the University of North Carolina’s Kenan-Flagler Business School, India-based consultancy firms such as Tata, Infosys or Wipro are “making strong moves into the US, leveraging a new model of global client assistance”.

As for Mr Barnier’s commission proposals, unveiled in September, their radical nature came as a shock. If pursued, they may offer opportunities for consultants outside the big four [PwC, KPMG, Ernst & Young and Deloitte] to poach staff. But they may also liberate some of the big audit firms to hunt for customers they are currently unable to approach.

Overall, the proposals may not change the competitive shape of European consulting much. “With audit, or without audit, these [big four] would be extremely powerful and high-quality consulting firms,” comments the MCA’s Mr Leaman.

The bigger threat in Europe comes from the continuing macroeconomic crisis.

If there is doom and gloom in the industry, it is, according to insiders, nothing like the sentiment just before the Lehman Brothers collapse in 2008.

Consulting firms are clearly now on the front foot. But then, as one consultant points out, “it was four months after Lehman that things got really difficult”.

Source: http://www.ft.com/intl/cms/s/0/e5ed3afe-086c-11e1-9fe8-00144feabdc0.html#axzz1et2QkiaZ

Risk management: regulatory scrutiny pushes risk centre stage

The practice of risk management has been transformed in recent times from one that used to look mainly backwards to one in which foresight and prediction are the keys to the game.
Risk monitoring and compliance have moved centre stage since the global financial crisis, driving the need for ever more advanced systems that attempt to capture the many and varied risks involved in the markets of today.

Ian Castledine, global head of investment risk and compliance product at Northern Trust, points out that five to 10 years ago, for the majority of pension funds, most risk measures were largely backward looking whereas now predictive models are much more the norm.

“Since the credit crunch the focus has been on counterparty risk, liquidity risk, transparency – in terms of the ability to understand what is going on in your portfolio at a security and derivatives trade level – and credit.”

He adds that with all of these factors efforts are made to integrate implied metrics into asset owner models. “For example, we are launching a credit dashboard that ties together the credit rating with a host of different metrics and paints a rich tapestry as a result. We also focus on how pension schemes use the analytics we provide. We have made efforts to break down and simplify the ‘technical talk’ into more easily understandable data and analytics,” he says.

Underlying much of the explosion of interest in risk management and compliance is heightened regulatory scrutiny. This has led many market participants to outsource to specialist risk managers the task of introducing the checks and balances necessary to satisfy regulators that their business is being conducted in the most prudent and transparent way.

Mr Castledine says regulatory change has created an immense area of opportunity across a number of industries, highlighting the examples of servicing Nordic banks for Solvency II or the pressure on Dutch pension funds to be fully transparent.

Companies are investing heavily in risk management tools against the backdrop of frequent regulatory change and the new climate of caution in the wake of the crisis.

As a result, providers of analytical tools have recently become sought-after acquisition targets. Evidence of this came earlier this month as IBM made its second analytics-related acquisition in a week, seeking to expand its offerings for risk management for financial services and related companies.

The company is buying Algorithmics, a Toronto-based provider of risk analytics and services to bank and other investment companies, for $387m. That follows its planned purchase of UK-based fraud prevention analytics provider i2 Group. It also bought OpenPages late last year to address operational risk. Indeed IBM has spent over $14bn on 26 analytics-related purchases in the past five years, expecting the market for analytics to be over $200bn by 2015.

IBM’s buying spree is further evidence that companies are increasingly recognising that their risk management monitoring must cover a vast array of potential factors.

One head of risk described what he was seeing as a new generation of client and risk monitoring characterised by the global trend of moving towards dynamic indicators, and away from a reliance on any one analytical measure.

New risks are continuing to be factored in to risk models. These include so-called frontier risks such as environmental and carbon, which were previously not quantified. Broadly, clients want their risk management providers to be able to capture, quantify and predict as broad an array of measures as possible.

Existing risk management providers are upgrading their services in the face of heightened competition. For example, Algorithmics, a provider of integrated collateral management and liquidity, regulatory and reporting solutions for the financial services industry, this month unveiled a new version of its regulatory reporting platform.

Within the asset management business itself, acquisitions have also been taking place.
For example, Natixis Global Asset Management announced earlier this month it had acquired a controlling interest in Darius Capital Partners, an investment advisory and research firm that provides customised hedge fund solutions to address institutional investors’ growing needs for transparency, liquidity and risk management. Such acquisitions are likely to be increasingly common as asset managers attempt to upgrade the risk management capabilities they can bring to the table.

Source: http://www.ft.com/intl/cms/s/0/aaf4a432-d923-11e0-884e-00144feabdc0.html#axzz1etVluwVV

Một cách nhìn khác về đầu tư công

(TBKTSG) - Tiềm năng chỉ là điều kiện cần. Điều kiện đủ để biến tiềm năng thành hiện thực là hiệu quả đầu tư công trên hai phương diện hiệu suất đầu tư cao và khả năng sử dụng đầu tư công để kích thích doanh nghiệp tư nhân, đặc biệt lĩnh vực công nghiệp hỗ trợ phát triển. Những hiệu quả này của đầu tư công lại chỉ có thể đạt được dựa trên tiền đề cải cách triệt để doanh nghiệp nhà nước.

Mối quan hệ đầu tư công và công nghiệp hỗ trợ

Đối với nền kinh tế mới bước vào giai đoạn đầu của công nghiệp hóa, để thực hiện tăng trưởng cần tăng đầu tư vốn toàn xã hội trong đó có đầu tư công. Đầu tư công ở đây được hiểu là phần đầu tư nhằm cung cấp những dịch vụ, hàng hóa công (đường sá giao thông công cộng, dịch vụ hành chính, giáo dục phổ thông…), mà không bao hàm vốn nhà nước trong khối doanh nghiệp nhà nước (DNNN). Đầu tư công dù về mặt thống kê được tính vào tăng trưởng, nhưng mục tiêu số một của nó là để cải thiện môi trường đầu tư, tạo điều kiện kích thích đầu tư tư nhân và đầu tư nước ngoài (những chủ thể mang lại tăng trưởng đích thực) phát triển.

Như đã đề cập, hiệu quả đầu tư công được xét trên hai phương diện: hiệu suất đầu tư công và hiệu quả kích thích tăng trưởng đầu tư xã hội nói chung, đặc biệt là đầu tư tư nhân nội địa. Hiệu quả kích thích phát triển đầu tư tư nhân trong đó có công nghiệp hỗ trợ nội địa lại có thể được đánh giá trên hai khía cạnh. Thứ nhất là kích thích gián tiếp thông qua việc cải thiện môi trường kinh doanh (điều kiện giao thông, đào tạo lao động…), và giảm chi phí kinh doanh. Thứ hai là kích thích trực tiếp thông qua việc cung cấp việc làm, tạo bước đệm cho doanh nghiệp nội địa đặc biệt là lĩnh vực công nghiệp hỗ trợ phát triển.

Ở các quốc gia bắt đầu công nghiệp hóa, như Việt Nam hiện tại, công nghiệp hỗ trợ nội địa thường bị rơi vào một vòng luẩn quẩn giữa “năng lực cung cấp yếu” và “bế tắc thị trường đầu ra” nên không phát triển được. Thực tế đa số nhu cầu đặt hàng công nghiệp hỗ trợ là của các nhà lắp ráp (chủ yếu là đầu tư nước ngoài) thuộc các lĩnh vực đòi hỏi sản phẩm có độ tinh cao như chế tạo ô tô, máy móc cơ khí, đồ điện gia dụng, trong khi trình độ công nghệ cũng như quản lý kinh doanh của công nghiệp hỗ trợ địa phương thường không đáp ứng được.

Trong khi đó, nhìn về mặt công nghệ kỹ thuật, phần lớn lĩnh vực mà đầu tư công (đặc biệt giai đoạn đầu của công nghiệp hóa) cần tập trung phát triển, như xây dựng hạ tầng giao thông, đường sá, cầu cảng, bến bãi, cấp thoát nước…, cũng yêu cầu cung cấp những sản phẩm công nghiệp hỗ trợ phục vụ các ngành công nghiệp chế tạo, tức là sử dụng công nghệ gia công định hình và xử lý bề mặt, cũng với các vật liệu sắt thép, hợp kim, nhựa, cao su, gốm sứ, thủy tinh, giấy, gỗ, vải hay chất dẻo tổng hợp. Chỉ khác nhau về độ tinh của sản phẩm. Cùng là sản phẩm đúc nhưng vỏ động cơ và hàng rào dùng trong xây dựng đòi hỏi độ tinh hoàn toàn khác nhau là một ví dụ.

Chính mức đòi hỏi độ tinh thấp tương đối của phụ kiện vật liệu trong lĩnh vực xây dựng hạ tầng (so với cơ khí máy móc) là điểm mấu chốt bảo đảm tính khả thi của vấn đề dùng đầu tư công để nuôi dưỡng công nghiệp hỗ trợ nội địa bước ban đầu. Nếu thực hiện quản lý sử dụng đầu tư công hiệu quả, những doanh nghiệp công nghiệp hỗ trợ nội địa nỗ lực cạnh tranh sẽ có khả năng “tập dượt” qua việc cung cấp sản phẩm cho các công trình phát triển hạ tầng bằng đầu tư công, từ đó nâng cao dần trình độ công nghệ kỹ thuật cũng như năng lực quản lý kinh doanh của mình, để có thể thâm nhập vào những thị trường đòi hỏi sản phẩm có độ tinh cao hơn trong tương lai.

Dĩ nhiên cần phải nhấn mạnh, để làm được điều này đầu tư công phải được triển khai một cách minh bạch và có tính cạnh tranh. Việc tổ chức, thực hiện và giám sát đầu tư công phải khoa học, công bình, công khai. Khoa học là dự án đầu tư công phải được khảo cứu kỹ lưỡng và tham khảo ý kiến các nhà nghiên cứu chuyên môn. Công bình và công khai là nhằm lựa chọn được những nhà cung cấp công nghiệp hỗ trợ có tinh thần doanh nghiệp thực thụ, có tư tưởng mưu cầu lợi nhuận chính đáng. Như vậy mới phát huy được hiệu quả nuôi dưỡng công nghiệp hỗ trợ nội địa của đầu tư công.

...Và việc cải cách doanh nghiệp nhà nước

Để tận dụng hiệu quả lan tỏa của đầu tư công đối với việc nuôi dưỡng kích thích sự phát triển của công nghiệp hỗ trợ nói riêng cũng như của doanh nghiệp tư nhân nói chung, cần tiến hành cải cách DNNN một cách triệt để nhằm bảo đảm một môi trường cạnh tranh tự do bình đẳng thực chất. Cải cách không chỉ vì sức ép hội nhập mà phải thay đổi vì sự phát triển của quốc gia. Vấn đề cải cách DNNN cần phải được xem lại một cách cơ bản, trả lại đúng chức năng vốn có của bộ phận này.

Theo kinh tế học hiện đại, DNNN được thành lập để cung cấp hàng hóa dịch vụ công, trong chừng mực đầu tư tư nhân chưa đủ năng lực thực hiện chức năng này. Vì vậy cải cách triệt để DNNN là giải phóng bộ phận này ra khỏi những lĩnh vực phi hàng hóa dịch vụ công, trả sân chơi lại cho doanh nghiệp tư nhân. Theo cách nghĩ này thì đặt DNNN hoạt động trong cùng một môi trường pháp lý với doanh nghiệp tư nhân, như cách Việt Nam đang thực hiện, dù bỏ hết những điều kiện bảo hộ khác, thì vẫn không phải là một môi trường cạnh tranh bình đẳng. Làm như vậy vẫn là chèn ép kinh tế tư nhân. DNNN đúng nghĩa không thể chịu điều tiết chung bằng một bộ luật chung với doanh nghiệp tư nhân mà phải có khung pháp lý riêng, và chỉ được phép hoạt động trong những lĩnh vực cung cấp hàng hóa dịch vụ công, mang tính độc quyền cao.

Tóm lại, vì lý do tham nhũng mà giảm đầu tư công, hạ chỉ tiêu tăng trưởng, chần chừ thực hiện cải cách DNNN, là những biện pháp hạ sách, không thể tạo ra mà chỉ có tác dụng kìm hãm sự phát triển. Để trong vòng một hai thập kỷ tới có thể sánh vai với các cường quốc trong khu vực, cần tăng cường đầu tư công hiệu quả, mạnh dạn đặt mục tiêu phấn đấu tăng trưởng hai con số, nhưng phải đồng thời triệt để cải cách hệ thống DNNN bằng cách trở lại đúng với chức năng cung cấp hàng hóa dịch vụ công, trả lại sân chơi còn lại cho chủ thể của kinh tế thị trường là doanh nghiệp tư nhân, sử dụng đầu tư công để tạo đà phát triển cho các doanh nghiệp công nghiệp hỗ trợ tư nhân nội địa.

Source: http://www.thesaigontimes.vn/Home/diendan/sotay/66430/Mot-cach-nhin-khac-ve-dau-tu-cong.html

Backlash from Netflix Buybacks

It is not Netflix's fault that investors priced its shares for perfection. But the Internet video company is to blame for managing its own balance sheet for the same flawless performance.

The former high-flier announced Monday night it had sold $200 million in new shares at $70 each and another $200 million in bonds convertible to stock at $85.80. Just months ago, the stock traded above $300. It is now at $72.



Netflix could easily have avoided this. The company has spent over $1 billion on share repurchases since 2007, leaving it with just $366 million in cash and $200 million in debt at the end of the third quarter. During that time, executives including chief executive Reed Hastings have been selling shares.

In buying back shares, Netflix failed to build a cash cushion against any slowdown in its heady growth rate. With expectations for healthy subscriber additions stretching into the future, the company locked into big contracts for streaming content. Since the start of 2011, the company has more than tripled such commitments to a whopping $3.5 billion, of which $2.9 billion is due in the next three years.

But everything changed this summer after the company raised prices and began bleeding subscribers. The company has not indicated subscriber losses have stopped and said it expects to lose money next year. Netflix has also said it expects free cash flow to lag net income over the next several quarters. In the year through September, the company's free cash flow was a modest $204 million, while buybacks totaled $200 million.

Unfortunately, dilutive stock and convertible issues have become Netflix's best option for raising cash to cover the potential outflows. The company sold $200 million in eight-year bonds in 2009, but those have a yield of about 7.3%, according to MarketAxess. So issuing more debt would mean large coupon payments. The newly-issued convertible doesn't include regular interest payments and won't mature until 2018.

What Netflix desperately needs is for streaming subscriber growth to resume. That should boost margins and cash flow, even though a portion of the content costs rise with viewership, because much of it was purchased for a fixed price. And if subscriptions improve, content owners could yet ask for higher fees in future deals, making a cash cushion crucial.

The lesson for growth companies is that buybacks can be risky—not just in large amounts, but at high prices. Netflix paid an average price of $45 a share for stock repurchased since 2007, below the current level of $72. But many of the recent purchases were at multiples of that price. If Netflix had refrained from aggressive buybacks until the business model was relatively steady, inevitable bumps in the road would have been much easier to ride out.

Source: http://online.wsj.com/article/SB10001424052970203710704577054431537105996.html?mod=WSJ_Heard_LEFTSecondNews

Hungary First To Offer Real Solution To Debt Crisis; Sets Stage for Gold's Re-Monetization

Hungary is considering allowing its citizens with mortgages denominated in a foreign currency -- typically the Swiss Franc -- to pay back their mortgages at an exchange rate that is lower than the current Forint/Franc exchange rate. Hungarian banks would be responsible for picking up the difference between the fixed exchange rate mandated by the government on these mortgages and the Forint/Franc market rate.

This plan has some problems -- in that Hungarian banks may not be able to afford picking up the tab on the exchange rate difference, and that the Swiss National Bank (SNB) may find an influx of capital, even in the form of loan repayments, to strengthen their currency (something the SNB has vowed to prevent) -- but I think it has some key features that may help us understand how the global sovereign debt crisis will be resolved, and what this means for the global economy. Specifically:

By letting those with mortgages pay back their debts denominated in foreign currencies at a lower exchange rate, Hungary is basically making banks pay for part of the loan -- not just the debtor with the mortgage. This type of debt cancellation is exactly what is needed and is the first step to a real solution. Until global debt levels are significantly reduced, there will not be sufficient capital available for investment or consumption. It's that simple.

By proposing a lower exchange rate for foreign-denominated loans, Hungary is pursuing an indirect form of currency appreciation; at least for Hungarians with mortgages denominated in foreign currencies, the Forint will be able to buy them a greater piece of their debt repayment. I still think the Forint has many problems and is not worth owning as a store of value, but a central bank pursuing a stronger currency in some way, while also helping advance the cause of debt cancellation, may be a policy we may see more of as this is at the heart of the solution to the global sovereign debt crisis.

As other central banks realize the need to strengthen their currency, they will naturally turn to where history has always turned to find strength in the midst of public debt crises: gold. This puts us on the trajectory toward some type of re-monetization of gold, which is what sends gold and gold mining shares both much, much higher.

Hungary's proposal here is also unlocking a new era in monetary policy, suggesting a reversal to fixed exchange rates and the end of the floating exchange rate system born when US President Richard Nixon terminated the link between US dollars and gold in 1971. We've already seen the SNB announce that they are basically pegging the Franc to the Euro, and now we are seeing talks of the Forint being pegged in certain situations at a rate different than what the market is pricing the Forint at. I don't think monetary authorities around the world have the trust of their constituents to pull this off, and think various forms of revolution and political re-organization are likely.

So, at the very least, developments in this story will be worth watching. If the right type of debt cancellation deal can be worked out, we may be on our way out of the global debt crisis and ready for the next secular bull market in equities.

Source: http://seekingalpha.com/article/293104-hungary-first-to-offer-real-solution-to-debt-crisis-sets-stage-for-gold-s-re-monetization

The euro: Beware of falling masonry

FIRST Greece; then Ireland and Portugal; then Italy and Spain. Month by month, the crisis in the euro area has crept from the vulnerable periphery of the currency zone towards its core, helped by denial, misdiagnosis and procrastination by the euro-zone’s policymakers. Recently Belgian and French government bonds have been in the financial markets’ bad books. Investors are even sniffy about German bonds: an auction of ten-year Bunds on November 23rd shifted only €3.6 billion-worth ($4.8 billion) of the €6 billion-worth on offer.

Worse, there are signs that the euro zone’s economy is heading for recession, if it is not there already. Industrial orders in the euro zone fell by 6.4% in September, the steepest decline since the dark days of December 2008. A closely watched index of euro-zone sentiment, based on surveys of purchasing managers in manufacturing and services, is also signalling contraction, with a reading of 47.2: anything below 50 suggests activity is shrinking. The European Commission’s index of consumer confidence fell in November for the fifth month in a row.

Now an even bigger calamity is looking likelier. The intensifying financial pressure raises the chances of a disorderly default by a government, a run of retail deposits on banks short of cash, or a revolt against austerity that would mark the start of the break-up of the euro zone.

The German government can probably shrug off a failed auction: it likes to price its bonds as richly as it can, and occasionally cannot sell all it would like, even in untroubled times. Still, the timing is awful, and other governments are not so lucky: the contrast between Germany’s borrowing costs and those of other euro-zone sovereigns is stark (see chart 1). European banks are dumping the bonds of the least creditworthy, and other assets, in an attempt to conserve capital and improve cashflow as a full-blown funding crisis looms. Governments are promising ever more severe budget cuts in the hope of pacifying bond markets. The direct result of these scrambles is a credit crunch and a squeeze on aggregate demand that is forcing Europe into recession. Add the indirect effects on the confidence of consumers and businesses, and the downturn will be deep.

A recipe for recession

Consider the three ingredients for recession: a credit crunch, tighter fiscal policy and a dearth of confidence. In aggregate, European banks’ loans exceed their deposits, so they rely on wholesale funds—short-term bills, longer-term bonds or loans from other banks—to bridge the gap. But investors are becoming warier of lending to banks that have euro-zone bonds on their books and that can no longer rely on the backing of governments with borrowing troubles of their own. Long-term bond issues have become scarce and American money-market funds, hitherto buyers of short-term bank bills, are running scared.

Banks are frantically shedding assets both to raise cash and to ration their capital in order to meet European Union minimum capital-adequacy targets by next June. The early victims of this deleveraging are borrowers in emerging markets. The euro zone’s eastern neighbours may be hit particularly hard: the Turkish lira, for instance, has come under pressure in the past week, a hint that money is flowing out. The repatriation of funds by euro-zone banks might explain why the euro has been remarkably stable against the dollar in recent weeks, despite the zone’s internal convulsions. But businesses and householders at home will also soon be hurt by scarcer credit and rising interest rates, as the banks’ higher funding costs are passed on.

Governments are cutting back too. The precise impact of next year’s belt-tightening is tricky to gauge. France’s budget plans are close to being agreed on; further cuts are likely but will be delayed until after the elections in spring. Italy has yet to vote through a much-revised package of cuts. Spain’s incoming government has promised further spending cuts, especially in regional outlays, in order to meet deficit targets agreed with Brussels.

Even so, it seems plain that fiscal tightening will weaken growth. Take the plans that countries presented to the European Commission and add what has been advertised since, and the squeeze across the euro area comes to around 1.25% of GDP next year, reckons Laurence Boone, chief European economist at Bank of America. That alone is enough, says Ms Boone, to chop around a percentage point off GDP growth in 2012. Germany will be the least affected of the zone’s four biggest economies, followed by France. Spain and Italy will be hurt most.

The euro zone’s businesses and consumers will be drawn into the downward spiral of confidence. In the autumn of 2008 companies learned that credit lines could not be relied on when banks were fighting for survival. When banks are short of liquidity, firms have to watch their own cashflow closely. That implies leaner stocks and reductions in discretionary spending, such as capital projects or advertising campaigns.

September’s sharp decline in industrial orders is an early sign that companies are cutting back. Andreas Willi, head of capital-goods research at JPMorgan, notes that SKF, a Swedish firm that is the world’s largest maker of ball bearings and a bellwether of industrial demand, gave analysts a cautious assessment of its future revenues in mid-October. That guidance suggests a further softening of investment demand. Consumers are also likely to defer big purchases as long as the crisis is unresolved and credit is scarce.

A drop in demand for capital equipment, durable consumer goods and cars will strike at the euro zone’s industrial heartland, including Germany. Ms Boone reckons GDP will fall by around 0.5% in Germany next year and by the same amount in the whole zone. In September the IMF forecast that the zone’s GDP would grow by 1.1% in 2012 but estimated that if European banks were deleveraging quickly (as they are now), the economy could shrink by around 2%.

Breaking point

A downturn of such severity will hugely increase the pressures within the zone. Investors will be even less willing to finance banks, as more garden-variety loans to businesses and householders turn bad. As unemployment rises, tax receipts will go down and welfare payments up, making it harder for governments to rein in their deficits and hit the targets they have set, and causing bond markets to question their solvency more pointedly still.

In such circumstances, the chances of a policy error or broader panic increase sharply. The calculations of bond investors, bank depositors and politicians are prone to sudden change. Hopes that the fracture of the euro zone might be averted by far-sighted policymakers could give way to a belief that it is inevitable. Such beliefs, once they take hold, are likely to be self-fulfilling.

How? The drying-up of funding for sovereigns and for banks is a threat to the integrity of the euro, because of the stark divide between debtor and creditor countries within the zone. As late as March 2010, Jean-Claude Trichet, then head of the ECB, boasted that simply belonging to the euro area automatically ensured balance-of-payments financing. It doesn’t look that way now.

During the credit boom, cheap capital flowed into Greece, Ireland, Portugal and Spain to finance trade deficits and housing booms. As a result, the net foreign liabilities—what businesses, householders and government owe to foreigners, less the foreign assets they own—of all four are close to 100% of GDP. (By comparison, America’s net foreign liabilities are 17% of GDP.) Much of their debt is being financed by local bank borrowing or bonds sold to investors in creditor countries, such as Germany. Ireland is unusual in that a large chunk of what it owes is in the form of equity (all those American-owned factories and offices) and so does not need to be refinanced.

With a few exceptions, the benchmark cost of credit in each euro-zone country is related to the balance of its international debts. Germany, which is owed more than it owes, still has low bond yields; Greece, which is heavily in debt to foreigners, has a high cost of borrowing (see chart 2). Portugal, Greece and (to a lesser extent) Spain still have big current-account deficits, and so are still adding to their already high foreign liabilities. Refinancing these is becoming harder and putting strain on local banks and credit availability.

The higher the cost of funding becomes, the more money flows out to foreigners to service these debts. This is why the issue of national solvency goes beyond what governments owe. The euro zone is showing the symptoms of an internal balance-of-payments crisis, with self-fulfilling runs on countries, because at bottom that is the nature of its troubles. And such crises put extraordinary pressure on exchange-rate pegs, no matter how permanent policymakers claim them to be.

One of the initial attractions of euro membership for peripheral countries—access to cheap funds—no longer applies. If a messy default is forced upon a euro-zone country, it might be tempted to reinvent its own currency. Indeed, it may have little option. That way, at least, it could write down the value of its private and public debts, as well as cutting its wages and prices relative to those abroad, improving its competitiveness. The switch would be hugely costly for debtors and creditors alike. But the alternative is scarcely more appealing. Austerity, high unemployment, social unrest, high borrowing costs and banking chaos seem likely either way.

The prospect that one country might break its ties to the euro, voluntarily or not, would cause widespread bank runs in other weak economies. Depositors would rush to get their savings out of the country to pre-empt a forced conversion to a new, weaker currency. Governments would have to impose limits on bank withdrawals or close banks temporarily. Capital controls and even travel restrictions would be needed to stanch the bleeding of money from the economy. Such restrictions would slow the circulation of money around the economy, deepening the recession.

External sources of credit would dry up because foreign investors, banks and companies would fear that their money would be trapped. A government cut off from capital-market funding would need to find other ways of bridging the gap between tax receipts and public spending. It might meet part of its obligations, including public-sector wages, by issuing small-denomination IOUs that could in turn be used to buy goods and pay bills.

When cash is scarce, such scrip is readily accepted by tradesmen. In August 2001 the Argentine province of Buenos Aires issued $90m of small bills, known as patacones, to employees as part of their pay. The bills were soon circulating freely: McDonalds even offered a “Patacombo” menu in exchange for a $5 pata c ón. Argentina broke its supposedly irrevocable currency peg to the dollar a few months later.

Scrip of this kind becomes, in effect, a proto-currency. In a stricken euro-zone country, it would change hands at a discount to the remaining euros in circulation, foreshadowing the devaluation to come. To pre-empt further capital outflows, a government would have to pass a law swiftly to say all financial dealings would henceforth be carried out in a new currency, at a one-for-one exchange rate with the euro. The new currency would then “float” (ie, sink) to a lower level against the abandoned euro. The size of that devaluation would be the extent of the country’s effective default against its creditors.

Market gurus and other students of misaligned stock, bond or home prices often say that although it is easy to spot an asset-price bubble, it is impossible to know the event that finally pricks it. In much the same way, the likeliest trigger for a disintegration of the euro is unknowable. But there are plenty of candidates. One is a failed bond auction that forces a country into default and sends a shock wave through the European banking system. Italy has €33 billion of debt coming due in the final week of January and a further €48 billion in the last week of February (see chart 3). Since bond investors are turning their noses up even at offerings from thrifty Germany, the odds against Italy’s being able to raise the money it needs early next year are uncomfortably short.

Another danger is a disagreement between Greece and its trio of rescuers (the EU, the IMF and the ECB) over the conditions of its bail-out. The risk of a mishap will be greater after the Greek elections in February if the country’s political mood sours yet further. Perhaps the spark will come from another source: the bankruptcy of a bank; fresh trouble in Portugal; or a chain of events that starts with France losing its AAA rating and ends with runs on banks across Europe. The exposure of French banks to Italy and to other countries that have been in bond traders’ sights for longer implies that contagion would quickly spread to the euro’s core (see chart 4). Widespread defaults in the periphery would wipe out a big chunk of Germany’s wealth and begin a chain of bank failures that could turn recession into depression.

The few left in the euro (Germany and perhaps a few other creditor countries) would be at a competitive disadvantage to the new cheaper currencies on their doorstep. As well as imposing capital controls, countries might retreat towards autarky, by raising retaliatory tariffs. The survival of the European single market and of the EU itself would then be under threat.

Such a disaster can still be averted. The ECB might launch a programme of bond-buying on the pretext that a deep recession in the euro area threatens deflation. If done on the scale that the Bank of England has undertaken, it could restore stability to Europe’s panicky bond markets. If bond purchases were made in proportion to the size of each euro member’s economy, that might go some way to overcoming German misgivings that the central bank was being used to provide favourable financing to profligate countries.

Such action by the ECB is an essential short-term palliative. But any lasting stability for the euro must lie with governments, particularly in the degree to which they are willing to give up fiscal sovereignty in return for pooling liabilities. Germany stands firmly at one extreme of this debate. Its chancellor, Angela Merkel, wants big changes to force probity (and wants the EU summit on December 9th to focus on such rule changes), but has opposed the idea of jointly guaranteed “Eurobonds”. German officials have argued that any open-ended commitment to joint liabilities would encourage errant governments to profligacy, violate Germany’s constitution and raise its borrowing costs. Even now, the head of the Bundesbank, Jens Weidmann, appears to believe that the imposition of fiscal rigour will be enough to restore calm to Europe’s bond markets.

Hanging together

Others think that circumstances demand speedier concentration on ways to pool liabilities. On November 23rd the European Commission laid out three approaches for issuing Eurobonds, two of which imply mutual guarantees.

Another new proposal is intriguing—thanks, in part, to its provenance. Germany’s Council of Economic Experts recently proposed a “European Redemption Pact”. This scheme would place the debt, in excess of 60% of GDP, of all euro-zone governments not already in IMF rescue plans into a jointly guaranteed fund that would be paid off over 25 years. Modelled in part on the federal government’s assumption of the debt of America’s states begun by Alexander Hamilton in 1790, the fund would provide joint liability for these debts under strict conditions. These would require euro-zone countries to introduce debt brakes into their constitutions, like the one Germany and Spain already have; give priority to paying off the mutualised bonds; set aside a specific tax revenue to do so; and pledge foreign-exchange reserves as collateral.

At its peak, the redemption pact would be huge: the joint liability would amount to €2.3 trillion. But it would technically be temporary. For all these safeguards, Germany’s government has so far poured cold water on the idea. But time is running out. And the scale of the impending catastrophe demands radical answers.

Source: http://www.economist.com/node/21540259

India’s currency: Rupee and the bears

THE result of headless-chicken financial markets or a canary in the coal mine? India is grappling with this question. On November 22nd the rupee fell to an all-time low against the dollar. The speed of the rout (see chart) has been scary for a place that was supposed to be largely insulated from the rich world’s troubles. It is 20 years since India had a balance-of-payments crisis and for a long time the talk has been about it becoming an economic superpower. But there lingers a memory of when it felt it was a financial hostage to the world, and this helps explain the whiff of panic now in the air. Mumbai’s financial types say that firms are scrambling to find dollars and that desperate euro-zone banks, which supply about half of India’s foreign loans, are cutting off credit lines.

That sense of fear strikes some as overdone. Jonathan Anderson, of UBS, a bank, has tagged the rupee a “drama queen”. India’s high inflation and chunky current-account deficit, financed by capital flows, mark it out from most of Asia. But neither attribute is new. Chetan Ahya, an economist at Morgan Stanley, thinks India has its problems, but that the weak rupee mainly reflects the trauma in global markets, which has caused capital flows to dry up. Hardest hit by global risk aversion are countries with external deficits. The currencies of other places with current-account gaps, such as South Africa and Turkey, have been walloped too.

To be sure, the rupee deserves a beating, given how India’s prospects have dimmed. “The currency markets have been late in reacting,” reckons Samiran Chakraborty, of Standard Chartered, another bank. “The Indian business community has been more negative than foreigners for some time,” adds Roopa Kudva, the boss of CRISIL, a ratings and research firm. India’s growth model has been to run a small current-account deficit, financed with high-quality capital inflows, such as foreign direct investment and equity purchases. As a poor country this makes sense: India should invest more than it saves. But bits of its approach look rickety.

For a start the current-account deficit is likely to overshoot projections of about 3% of GDP for 2011, if October’s trade figures are anything to go by. Exports slowed faster than imports, a chunk of which are non-discretionary commodities and oil. The investment climate has soured due to stubborn inflation, high interest rates and GDP growth that may dip below 7% in the coming quarter. Pessimism about the government’s appetite for reform has surely hurt India’s ability to attract capital. Neelkanth Mishra, a strategist at Credit Suisse and a longstanding bear on the economy, reckons the quality of capital coming in is falling too, with flightier and riskier debt rather than stickier equity investments.

The falling rupee, then, partly reflects India’s economic failings. But will a cheaper currency add to these problems or help solve them? It should eventually narrow the external deficit, by boosting exports and limiting imports. Still, a sharp fall in the currency can be deadly if a country has borrowed in other people’s money. India’s indebted government sells its rupee bonds to locals, mainly banks, not jittery foreigners. The trouble is that since India’s banks are forced to stuff themselves full of loans to the state, Indian firms have had to borrow abroad. Sanjeev Prasad at Kotak, a broker, says that the recent results season saw a host of firms booking losses as the value in rupees of their foreign debts rose. He worries about them being able to refinance these borrowings.

And a lower rupee will fan inflation, which is already at 9-10%. The Reserve Bank of India (RBI), India’s central bank, and the government have been praying that it will slow. But a rough rule of thumb is that a 10% depreciation adds 60-100 basis points to inflation, says Mr Chakraborty at Standard Chartered. That’s unhelpful.

For the authorities there are three possible responses. They have already done the first: easing the rules on foreign lending to India, to try to attract short-term funds. The second option would be to intervene in the currency markets by selling dollars and buying rupees. That might, though, complicate domestic policy, by tightening monetary conditions further. If the RBI bought banks’ rupees then those lenders would have fewer available to buy government bonds, further increasing the already high borrowing costs of the state. The RBI could try to offset this by buying government bonds directly, but that might in turn hamper its efforts to support the rupee.

And has India enough firepower? The country has $314 billion of reserves, largely thanks to the central bank intervening in the past to stop the rupee appreciating too much. But that cushion is not as big as it seems. Mr Mishra reckons foreign debts that must be repaid within a year now equal 48% of India’s reserves. Using a similar approach of deducting short-term debts from reserves, Mr Anderson reckons India’s net position has deteriorated. Compared with other countries it is only middlingly good (see chart) and the RBI may be nervous of using too much ammunition.

That leaves a third option: for the politicians to make tough choices. If it cut its fiscal deficit the state would probably lower the current-account deficit. And if reforms were sped up, growth might recover, inflation could fall and foreign investment would pick up. The priorities include freeing the supply chains that have caused high food prices and cutting the red tape that is choking industrial projects. So far the omens are not promising. On November 22nd, the first day of the winter sitting of India’s parliament was adjourned due to raucous behaviour. Sadly, the rupee is not the only drama queen around.

Source: http://www.economist.com/node/21540263?fsrc=rss%7Cfec

Banks in Italy Find an Unusual Liquidity Lifeline

LONDON — The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market.

With cash increasingly hard to come by, Italy’s banks are turning to CC&G, the exchange’s Italian clearinghouse, for short-term lending. That includes some of the country’s largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation.

While just two banks received short-term capital from CC&G in 2009, that number has now risen to 15 — half of them Italian and the rest European financial institutions that trade in the country.

Under terms of the deals, the clearinghouse, which acts as a middleman to guarantee trades between financial parties, is offering money to both Italian and European banks with a presence in Italy for up to three days.

The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

Previously, banks had used the so-called repo market, where banks lend capital to each other on a short-term basis, to meet their financing requirements. But fears about Italy’s ability to repay its debts has pushed up borrowing costs and reduced the ability of banks to access that market.

A spokesman for the exchange said the company was in close discussions with the Italian central bank about any potential problems in the country’s financial sector, and used stringent risk management to decide whether to give banks access to capital.

CC&G also doesn’t technically lend money to banks, but instead deposits the cash with them on a short-term basis. Under Italian law, this distinction makes CC&G a depositor with the banks, and places it ahead of other creditors looking to get their money back if any financial institution should fail.

The legal distinction may still leave CC&G exposed if a lender defaults. And analysts question the sustainability of lending to struggling banks. That’s particularly true as the collateral offered to institutions as short-term financing is often provided by the same bank’s separate trading operations.

Paul Rowady, senior analyst at financial consultancy TABB Group in Chicago, said the global squeeze on liquidity was forcing institutions to look elsewhere, including to clearinghouses, to meet their short-term financing commitments.

He added that central clearing parties might feel secure in lending to banks because it was on a short-term basis and they were eager for extra revenue.

“Financial entities are making money in new and different ways,” he said. “Just because times are bad doesn’t mean they’re not looking for profits.”

And Italy’s turmoil has been good business for the London Stock Exchange. According to the exchange, CC&G reported a 209 percent jump in income to £54.3 million, or $83.6 million, during the first half of the year, compared with the same period in 2010.

The Italian business now represents 14 percent of the exchange’s overall income, compared with just 5 percent in the first half of 2010.

Source: http://dealbook.nytimes.com/2011/11/17/banks-in-italy-find-an-unusual-liquidity-lifeline/

Glencore Needs More Than a Squeeze

Glencore's share price could do with a fillip. The Swiss company's stock has fallen 25% since its heavily hyped flotation in May, as investors struggle with its unusual mix of mining and trading. Late next week, more of Glencore's shares will become tradable, offering hope of a technical bounce. For now, such hope looks overrated.

Glencore's free float is now a measly 11.7% of its share base. Company employees hold most of the rest, including CEO Ivan Glasenberg's 15.7% stake. But Glencore gained quick entry into the FTSE 100 on the promise its free float would expand to meet the 50% minimum required of foreign companies within a year of its May 24 listing. Next Thursday cornerstone investors in Glencore's IPO—including Abu Dhabi's sovereign-wealth fund, BlackRock and a Chinese mining company—become free to sell their stakes, totaling 5.2% of Glencore's shares.

For index purposes, Glencore's increased 16.9% float will be treated as a 20% free float. In turn, Glencore's weighting in FTSE and MSCI indexes will rise. Funds that track these benchmarks will have to buy more Glencore shares. Assuming FTSE and MSCI tracker funds now hold 10% and 5% of Glencore's free float, they could have to buy 83 million more shares, Credit Suisse estimates.

That will represent 7% of Glencore's increased free float, a significant chunk. Still, the impact will be phased: The FTSE's reweighting takes effect on December 16th, the MSCI's not until the end of February. Existing investors will have had plenty of time to position themselves ahead of the changes. And some cornerstone investors might decide to sell part of their holdings.

Besides Glencore's share price is unlikely to become detached from fundamentals for long. In May, employees are free to sell their 36% stake in the company, triggering another index reweighting. Whether this causes a stock squeeze or a share-price fall will depend on how many of Mr. Glasenberg's colleagues share his optimism about Glencore's future.

Source: http://online.wsj.com/article/SB10001424052970203611404577046141100287990.html?mod=WSJ_Heard_LEFTTopNews

Cái giá của cam kết tỷ giá

(TBKTSG) - Cam kết duy trì tỷ giá đến cuối năm không quá 1% của Ngân hàng Nhà nước (NHNN) đã tạo ra phí tổn mà NHNN phải gánh chịu, trong khi những lợi ích lại không rõ ràng.

Mua uy tín bằng cam kết?

Vào thời điểm NHNN đưa ra cam kết nêu trên (tháng 9-2011) thì tỷ giá liên ngân hàng đang ở mức 20.628 đồng/đô la Mỹ. Nếu dựa vào mức tỷ giá này và giả sử NHNN đủ khả năng can thiệp thị trường thì đến cuối năm tỷ giá mục tiêu sẽ không thể vượt quá 20.834 đồng/đô la Mỹ. Hiện, tỷ giá liên ngân hàng đang ở mức 20.803 đồng/đô la Mỹ, tức đã tăng 0,85% so với tỷ giá thời điểm cam kết. Với thực trạng và viễn cảnh không mấy khả quan của các cân đối kinh tế vĩ mô (thâm hụt cán cân thương mại, thâm hụt ngân sách, lạm phát...) từ nay đến cuối năm, thì khả năng duy trì được tỷ giá mục tiêu nêu trên của NHNN là rất khó khăn và tốn kém.

Đứng ở vị trí của NHNN, nếu mục tiêu của sự cam kết này đạt được thì có lẽ lợi ích quan trọng nhất chính là uy tín của NHNN và niềm tin của thị trường - những thứ vốn đã mất đi và NHNN đang cố gắng lấy lại nó. Trong điều kiện đó, NHNN sẽ phải can thiệp trên thị trường ngoại tệ để đưa tỷ giá về mức mục tiêu, tức là phải giảm dự trữ ngoại tệ - thứ mà NHNN lại không hề muốn. Điều này cũng có nghĩa là NHNN phải dùng tiền (ngoại tệ) để mua uy tín cho mình. May mắn thay khi uy tín vẫn có thể mua được bằng tiền nhưng không may là phí tổn của sự cam kết tỷ giá là không hề nhỏ, mà đối tượng hưởng lợi lại không rõ ràng, thậm chí có khả năng lợi ích đang bị phân bổ một cách thiên lệch sang một số nhóm đối tượng vốn đang được hưởng nhiều đặc quyền.

NHNN bán hợp đồng quyền chọn?

Mặc dù không phải hoàn hảo nhưng có thể ví việc NHNN đưa ra cam kết duy trì tỷ giá mục tiêu đến cuối năm như việc một ngân hàng bán cho khách hàng một quyền chọn (options). Chẳng hạn, khi dự kiến tỷ giá tăng, nhà nhập khẩu sẽ gặp bất lợi và người này sẽ tìm cách ký với ngân hàng một hợp đồng quyền chọn mua ngoại tệ (call options) nhằm bảo hiểm rủi ro tỷ giá. Dựa vào hợp đồng quyền chọn mua, nhà nhập khẩu có quyền mua từ ngân hàng một lượng ngoại tệ nhất định theo một mức tỷ giá xác định trước (gọi là tỷ giá thực hiện) vào một thời điểm nhất định trong tương lai. Vào thời điểm này, nếu tỷ giá trên thị trường cao hơn mức tỷ giá thực hiện thì nhà nhập khẩu có quyền buộc ngân hàng phải bán cho mình ngoại tệ theo tỷ giá thực hiện.

Ngược lại, nếu tỷ giá thị trường thấp hơn tỷ giá thực hiện thì nhà nhập khẩu không có nghĩa vụ phải mua ngoại tệ từ ngân hàng, thay vào đó họ có thể mua trên thị trường và hủy hợp đồng quyền chọn mà không phải chịu bồi thường trách nhiệm gì cả. Trong bất kỳ trường hợp nào thì nhà nhập khẩu vẫn phải trả cho ngân hàng một khoản tiền không được hoàn lại để có được cái quyền như trên mà người ta gọi là phí quyền chọn. Phí quyền chọn cũng có thể xem là giá của trách nhiệm hay chi phí của rủi ro mà ngân hàng bán quyền chọn phải gánh chịu một khi quyền thực hiện được trao cho khách hàng.

Như vậy, việc NHNN cam kết duy trì tỷ giá dưới mức 20.834 đồng/đô la Mỹ cũng tương tự như việc NHNN bán cho nhà nhập khẩu một quyền chọn mua với tỷ giá thực hiện là 20.834 đồng/đô la Mỹ. Căn cứ vào tỷ giá hiện hành, kỳ hạn hợp đồng, tỷ giá cam kết của NHNN và một số giả định khác thì giá cho một quyền chọn mua hiện nay được xác định là khoảng 2.800 đồng/đô la Mỹ(1). Điều này có nghĩa NHNN sẽ thu được 2.800 đồng cho mỗi một quyền chọn mua 1 đô la Mỹ được bán ra có kỳ hạn đến cuối năm.

Tuy nhiên, việc cam kết duy trì tỷ giá của NHNN giống như việc cung cấp quyền chọn mà không kèm theo khoản phí quyền chọn. Cho nên cứ mỗi một đồng đô la Mỹ được bán ra tại mức tỷ giá cam kết, NHNN phải chịu mất một khoản chi phí cơ hội là 2.800 đồng. Chi phí cơ hội này cũng lớn hơn rất nhiều so với dư địa mà ở đó NHNN có thể giảm giá tiền đồng. Nhân con số chi phí cơ hội này với lượng đô la Mỹ mà NHNN phải bán ra trên thị trường ngoại tệ để duy trì mức tỷ giá mục tiêu cho thấy được một khoản chi phí cơ hội không hề nhỏ mà NHNN đã phải mất đi, chưa tính chi phí trực tiếp do việc suy giảm dự trữ ngoại tệ.

Ai được quyền mua quyền chọn?

Việc “biếu không” quyền chọn mua ngoại tệ của NHNN không khác gì là một hình thức “trợ cấp” của Chính phủ. Vấn đề quan trọng là việc trợ cấp “tỷ giá” như vậy có thực sự cần thiết hay không và ai là đối tượng (đáng) được hưởng trợ cấp. Rõ ràng, trong điều kiện kinh tế hiện nay thì việc trợ cấp theo kiểu của NHNN là quá xa xỉ và quá tốn kém, mà cũng không mang lại hiệu quả gì. Trong khi đó, đối tượng hưởng “trợ cấp” lại không rõ ràng và nguồn lực lại đang được sử dụng một cách kém hiệu quả, không công bằng và thiếu minh bạch. Bằng chứng là không phải bất kỳ thành phần doanh nghiệp nào cũng có thể tiếp cận được với mức tỷ giá mà NHNN cam kết.

Thực tế thì nhiều doanh nghiệp vẫn phải mua ngoại tệ trên thị trường phi chính thức với tỷ giá cao hơn hẳn so với tỷ giá niêm yết chính thức của các ngân hàng thương mại, trong khi tỷ giá của các ngân hàng này cũng gần như đã chạm trần biên độ. Mặc dù đối tượng được phép mua ngoại đã được quy định cụ thể nhưng trên thực tế thì phần lớn các doanh nghiệp vẫn phải chật vật mới có được nguồn ngoại tệ “hợp pháp” nhằm đáp ứng nhu cầu kinh doanh của mình. Chỉ có các tập đoàn kinh tế, các tổng công ty nhà nước và một tỷ lệ nhỏ các doanh nghiệp khối tư nhân vốn có uy tín với ngân hàng mới tiếp cận được nguồn ngoại tệ dễ dàng hơn.

Nói khác đi, không phải đối tượng nào cũng có khả năng và có quyền để mua “quyền chọn”. Bản chất của vấn đề này chỉ là một hình thức thể hiện các đặc quyền nhà nước qua cái gọi là “quyền chọn”.

Nói chung, việc cam kết duy trì tỷ giá đến cuối năm không quá 1% của NHNN là hết sức tốn kém, bởi không chỉ được đánh đổi bằng dự trữ ngoại tệ mà còn là chi phí cơ hội do việc phân phối “quyền chọn” miễn phí. Trong khi đó, khả năng thực hiện cam kết của NHNN lại không cao, lại không có tính ràng buộc, nghĩa là hợp đồng quyền chọn không có khả năng cưỡng chế. Điều này có nghĩa là NHNN không dễ gì có thể dùng dự trữ ngoại tệ để mua uy tín cho mình, lại càng không thể tạo dựng niềm tin thị trường bằng sự thiên lệch trong phân bổ lợi ích với một cam kết chính sách quá nghịch lý như vậy xét trong bối cảnh vĩ mô hiện nay.

Source: http://www.thesaigontimes.vn/Home/taichinh/nganhang/65866/Cai-gia-cua-cam-ket-ty-gia.html

Hedge funds and deleveraging: Waiting to turn trash into treasure

“THIS is going to be the next great trade,” one American hedge-fund executive effused early this year. For more than two years funds have been salivating over the slew of assets that Europe’s banks will have to sell. Many have been opening offices in London and hiring to prepare for this “tidal wave” of opportunities.

Up for grabs will be distressed corporate loans, property debt and non-core businesses as European banks shrink their balance-sheets to meet stricter capital requirements. Huw Van Steenis of Morgan Stanley estimates that banks will have to downsize their balance-sheets by €1.5 trillion-2.5 trillion ($2 trillion-3.4 trillion) over the next 18 months. Funds have only about $150 billion to spend on distressed debt in Europe, he reckons, which means they should have their pick of assets.

For now the “next great trade” is not looking that good, mainly because there have been no fire sales. Most banks that are selling assets have priced them close to face value, providing little to entice buyers.

Even where sales are agreed, financing is scarce. In July Blackstone, a large alternative-asset manager, agreed to buy a £1.4 billion ($2.2 billion) real-estate loan portfolio from Royal Bank of Scotland, but has yet to raise an estimated £600m to pay for it. Worse still, many banks may not be able to sell assets cheaply even if they wanted to, because it would force them to take losses that would erode scarce capital.

“We’ve been lying in wait for this opportunity since 2008. But it will come piecemeal. It will take years and years and years,” says Joe Baratta, head of European private equity at Blackstone. Some predict that Europe could go the way of Japan’s glacial deleveraging and take a decade or more to clean up its banks. Politics play a role too. European politicians, no hedge-fund lovers, won’t want to see them buying up assets at truly distressed prices and profiting from Europe’s gloom. It may even be “politically impossible” for banks that got a government bail-out to write down assets significantly, says Jonathan Berger, the president of Stone Tower, a $20 billion alternative-asset firm.

What could turn things around? Some fund managers hope a plan to recapitalise Europe’s banks to the tune of €106 billion by next June will at last force disposals at banks. So too may the introduction of Basel 3 rules that will require banks to hold more high-quality capital. Marc Lasry, the boss of Avenue Capital, a distressed-debt hedge fund, wants to buy from these “forced sellers”, because they will offer lower prices.

Banks aren’t the only prey that funds are hunting. A wave of refinancing that will hit private-equity-owned firms over the next few years may prove profitable for distressed-debt funds. And plans by some European governments to privatise infrastructure assets may also be enticing.

In the meantime, inventive fund managers are figuring out other ways to do deals. Some, such as Highbridge, a large American hedge fund that is owned by JPMorgan, and KKR are scaling up their lending operations as banks cut back. They are able to charge high interest rates, because companies are desperate for cash.

Banks are being inventive too. Unable to sell assets, they have come up with a compromise of sorts, and have started agreeing to “synthetic risk transfer” arrangements with hedge funds. For example, BlueMountain Capital, an American hedge fund, has agreed to take on some risks on a credit-default swap portfolio from Crédit Agricole, a French bank. Another hedge fund, Cheyne Capital, has reached an arrangement with two big banks in Europe to take the first 4% or so of losses from a securitised portfolio of loans, in exchange for a very healthy return.

Funds’ investors may need convincing, given that “synthetic” became a dirty word after 2008. The deals can also be risky, says Galia Velimukhametova of GLG Partners, a European hedge fund. “You could lose 80-90% of your capital if things go very wrong, but make 10-15% if everything goes right,” she says.

Robert Koenigsberger of Gramercy, an emerging-market hedge fund focused on distressed investing, insists it is best to look elsewhere. “The best distressed opportunities created by Europe are now outside of Europe,” he says. He believes opportunities are particularly bright in emerging markets. Many of them are undervalued because investors are selling everywhere as a result of worries about the stability of the euro zone.

For those hedge funds set on playing Europe, the main dilemma they face is how long to wait before buying. Steve Schwarzman, the boss of Blackstone, insists that it is important to stay put. “It’s like dating someone,” he says. “You can say let’s wait two years. But she probably won’t be around then.”

Source: http://www.economist.com/node/21538739

How investors can get more out of infrastructure

Rarely have investments in global infrastructure—everything from roads, bridges, and tunnels to schools, hospitals, and power plants—held the spotlight as they do now. Governments around the world are increasingly comfortable using private money to finance such projects, while investors have poured large sums into specialist funds in hopes of obtaining attractive inflation-adjusted returns. From 2006 to mid-2007, we estimate, private investment funds raised $105 billion for infrastructure projects.

All of this interest heightens competition and creates a problem for fund managers and investors seeking profitable infrastructure opportunities. If funds follow the crowd, bidding to operate existing assets under a business-as-usual model, they run a double risk because of the sheer volume of dollars now chasing deals and driving up prices: either they lose out to more audacious competitors, or they risk overpaying and achieve suboptimal returns. Yet funds are under growing pressure to invest the money they raised. They can’t sit on the cash indefinitely.

So infrastructure investors must raise their game in two ways. First, they should become better at extracting value from projects by improving their operational capabilities. Second, they ought to use this more sophisticated operational perspective to assess the risks of nontraditional infrastructure deals—such as those that involve complex operations, emerging markets, or new assets.

If this story sounds familiar, it should: private-equity firms followed a similar path over the past decade. Leading ones evolved their business models to create value from not only financial engineering but also managerial and operational improvements; at the same time, they gained the confidence to invest in more and more complex businesses. By learning the same lessons—and understanding best practice from industries, such as oil and gas, that routinely face the same sort of complexity in unfamiliar locations—infrastructure funds should produce returns that will keep investors happy.

The money is here—what about the deals?

During the past two years, the flood of money into infrastructure funds has been astonishing: the world’s 20 largest now have nearly $130 billion under management, 77 percent of it raised in 2006 and 2007 and about 63 percent from new entrants. Taking into account leverage, a billion dollars of equity funding could, in some situations, pay for up to $10 billion in projects.

Where will all the money go? The value of infrastructure buyout deals has already grown from roughly $20 billion in both 2003 and 2004 to $106 billion last year. The volume of the developed world’s remaining traditional brownfield opportunities—those in existing infrastructure, such as owning and operating a toll road—won’t satisfy investor demand over the next three to four years. Bidding for these deals is already intense,¹ which has pushed up price-to-earnings multiples. The multiple of 9 achieved by Italy’s Aeroporti di Roma when it was sold in 2002, for example, is dwarfed by the multiple of 27 that investors paid for the UK’s London City Airport in early 2007; in the ports sector, the multiple of 9 paid for Hesse-Noord Natie in 2002 was less than half the multiple of 20 achieved by Orient Overseas in 2006. Meanwhile, in North America the competition for road projects has become increasingly heated —as seen in the multiples commanded by the Indiana Toll Road and Chicago Skyway deals. High valuations mean that funds must work much harder to generate satisfactory returns.

Investors hoping to avoid these sky-high valuations can target more attractive deals if they are willing to look beyond existing infrastructure in developed economies and consider the following:

• projects in emerging markets—which, we estimate, will require more than $1 trillion in capital over the next ten years
• complex brownfield deals, which typically have a substantial construction element because of the upgrade and refurbishment work involved
• wholly private infrastructure opportunities, such as private industrial rail lines and power plants or the full privatization of infrastructure providers

Exhibit 1 shows what this approach might mean for the global transport sector. Of the $360 billion of transport-related projects we have identified from now until 2010, around $305 billion are either located outside the Organisation for Economic Co-operation and Development (OECD) countries or lack established income streams.

New types of deals, of course, expose investors to a large number of new risks, many of them difficult to quantify. If not managed, such risks open fund managers to the charge that they are straying into projects that look more like traditional equities than like infrastructure. But managers who don’t consider nontraditional projects will shut themselves out of the lion’s share of the opportunities in coming years.

In this more bracing environment, funds need a new approach. Most investors have typically created value through financial engineering and rising user demand. They have acted less aggressively to improve operations; indeed, many financial investors still leave such issues to contractors and focus their governance efforts on financial metrics.

The old business model is ill suited to capturing the opportunities in today’s competitive market. Infrastructure investors must not only spot ways to improve operating cash flows before committing their capital but also ensure that they have the knowledge and expertise to enhance the value of a highly priced asset once they own it. Moreover, they have to anticipate and assess the operational complexity of any nontraditional project in order to understand and manage the risks of bidding for it.

For funds that can master infrastructure operations, the prize is twofold: a better chance of winning traditional deals and making them profitable, as well as the ability to bid for more operationally complex and less competitive types of infrastructure. These strengths also give investors the confidence to walk away from overpriced deals.

The devil’s in the operations

One key attraction of infrastructure investments is the prospect of reasonably straightforward operations: there is less scope for management discretion in running a bridge, for example, than a global retail chain or a software house—not, of course, that such investments leave no room for operational improvement or can’t create significant value. This straightforwardness is a characteristic not only of the roads sector, traditionally seen as one of the most operationally undemanding categories of infrastructure, but also of more complex categories, such as airports, power plants, and transit systems.

Exhibit 2 highlights the performance of five leading infrastructure-management companies active in a single EU country. Despite the common working environment, the operations and economics of each company’s toll collections, motorway patrols, and routine maintenance work are quite different. In fact, all of these companies showed room for improvement in one or more aspects of the business—no single contractor was best across the board.

Our work with road operators provides many examples of operational improvements and feasible savings. Some techniques are sophisticated, such as restructuring procurement systems to bring in smaller raw-material companies and thus make suppliers more competitive. Others are strikingly simple: for instance, designing the shape of embankments to minimize construction time or drafting winter maintenance contracts in order to reduce unnecessary salting and sanding. In projects that involve existing roads, experience suggests, a proactive investor could cut its costs by 9 to 16 percent in present-value terms by raising the operations of European or North American highways from average to best in class. That would certainly allow a bidder to be a touch more aggressive—say, by offering 22 rather than 20 times EBITDA²—and also preserve acceptable rates of return. While a change of this magnitude isn’t transformative, it has the potential to make the difference between winning and losing a bid or to help an investor recognize that it’s time to walk away.

The importance of operational improvements grows as infrastructure projects become more complex. Macquarie and Ferrovial’s coinvestment in the UK’s Bristol International Airport, for example, involved upgrading signage systems; renewing check-in, baggage reclaim, and catering facilities; rerouting foot traffic; and installing all-weather landing equipment. The investors also rejuvenated the airport’s retail offering, strengthened the management and sales teams, and even tweaked the system for booking parking spaces. In the four years after the acquisition, the number of passengers using the airport doubled—as did its EBITDA. More recently, the management of the airport had to address operational concerns over its runways to ensure the project’s continued success. Ferrovial’s subsequent acquisition of the British airports operator BAA has involved complex decisions about airport logistics, security, management restructuring, regulatory strategy, and investment priorities. It would be unthinkable for an investor with no expertise in the transport sector to make these decisions.

Even the apparently straightforward business of rail maintenance offers room for greater efficiency. Work with a range of OECD rail operators suggests, for instance, that implementing best-practice procedures in maintenance scheduling, repairs, purchasing, and overhead management can cut annual upkeep costs by 15 to 30 percent. Routine maintenance is usually just the start of the challenge, however. Complex decisions about signaling systems, integration with other networks, and negotiations with rail operators all offer further scope for operationally savvy investors to distinguish themselves from less sophisticated ones.

Again, these realities should come as no surprise to anyone who has followed the development of the private-equity industry. A McKinsey analysis of 60 completed private-equity deals showed that over 60 percent of the value they created arose from improving the performance of companies (that is, raising revenues and margins or redirecting corporate strategy) rather than financial engineering, arbitrage, market timing, or sector appreciation.³

Mastering investment risk

Operational understanding and operational capabilities are essential for assessing and managing risk. The ability to deal with risk is in turn a prerequisite for investing in projects—in particular, greenfield projects, deals in emerging markets, and complex schemes—that might scare other bidders. It is also required to know which deals to avoid.

When investors deal with a familiar type of brownfield infrastructure project in a well-understood geography, assessing and managing risk is relatively straightforward. They can typically assess the levels of demand risk, maintenance cost risk, and political risk, if any; factor the financial impact of unexpected events into a bid; and track such problems over a project’s life.

The number and magnitude of the risks increase if a project involves building a new asset, operating in a complex or untested regulatory environment, or bidding for an asset that has complex interdependencies with other projects. McKinsey’s work with leading developers in the oil, gas, and energy sectors, where complex billion-dollar-plus projects in unfamiliar locations are a fact of life, highlights practices that infrastructure experts can use to advantage.

In the preproject phase, for example, successful developers tailor their project-development and risk-management processes specifically to the venture in hand rather than rely on standard processes. They assess various types of risk in a structured way, avoiding unwarranted focus on a single category, such as technical delivery or regulatory compliance. To do all this, and to reduce the dangers of faulty intuition or any bias toward optimism, they quantify and prioritize risks wherever possible and regularly revisit their estimates.

Once a project is under way, good governance is the key to managing risk. Leading developers ensure single-point accountability wherever possible, giving project teams direct control over the resources needed to complete the work and avoiding matrix or functional structures. To prevent silos from developing as projects unfold, a centralized integration function should regularly and rigorously review them to ensure that they are on track or, if they aren’t, that corrective measures are taken swiftly. Finally, successful developers implement appropriate financial incentives to make sure that the owners of risk manage and optimize it.

Investors incapable of assessing risk accurately may come to grief. Consider the early difficulties in building the Channel Tunnel between France and Britain. The initial winners of the contract, in 1986, did little work on detailed design and produced cost estimates that one recent study described as “more or less rough guesswork.”⁴ A subsequent change of ownership at Eurotunnel led to the appointment of a new management team, a more detailed assessment of risk, and tighter contracting terms. In the end, the massive project was completed close to deadline, though at a cost substantially above initial estimates (see sidebar, “Effective infrastructure investment: The public-sector perspective”).

The energy industry provides more recent examples of the importance of assessing and managing risk. Increasingly, developers such as Marubeni undertake lump-sum turnkey projects to build power plants (Middle Eastern ones, in Marubeni’s case), taking ownership of construction risk and creating the incentives and processes needed to manage it. A leading oil company assesses a major investment’s probability of success by developing scenarios and stochastic models and then uses its findings as a yardstick for measuring the effectiveness of plans to mitigate any risks. Such lessons are just as useful for investors in infrastructure, as well as the funds that finance it, because this kind of project integration and control is something they are well positioned to provide.

Likewise, successful private-equity funds have been defined in part by their exceptional ability to assess and manage the risks in their portfolios of companies. In the 1990s, Nomura’s Principal Finance, a leading buyout firm of the time, purchased state-owned Angel Trains, one of the UK’s three lessors of passenger rolling stock. It then proceeded to demonstrate how much such firms could achieve. Nomura conducted a detailed due diligence and financial analysis to demonstrate that Angel’s future cash flow was more secure than other bidders realized and that they had exaggerated the safety risks. These efforts allowed Nomura to bid competitively in what was then an untested asset class. Refusing to accept the incumbent management’s claims, Nomura itself also assessed the possibility of raising Angel’s operating efficiencies. After winning the auction, Nomura quickly set new objectives for Angel, reorganized its management to achieve them, and kept a close eye on the operational risks already identified. The lesson—that good risk management not only reduces the potential downside but also creates an additional upside—holds true for today’s infrastructure investors as well.

Next steps for funds

Infrastructure investors and the funds they subscribe to must take important steps—one strategic, the other organizational—that will make them better able to improve both the operations they oversee and the way they deal with risk. First, they should focus on a manageable range of sectors where they can apply real insights that will help them source transactions, pay appropriate prices, and extract maximum value. Second, they should create a team of in-house experts to assess and manage the risks. Much as large buyout funds have moved on from the “three bankers and a Rolodex” model, so too infrastructure investors will probably need to start hiring people with experience beyond investment banking or commercial financing. They should consider former asset operators, risk managers from financial institutions, and former officials of government infrastructure departments.

The benefits of focus

Many of today’s new infrastructure funds were set up with a broad remit that helps them attract new capital quickly—their offering memoranda give them enough flexibility to target a wide range of infrastructure types in a wide range of countries. This kind of freedom has to be managed carefully; bidding reactively for projects in many disparate sectors probably won’t create value if a fund lacks the relevant expertise. Successful infrastructure players, such as Macquarie, direct their investments to high-potential areas in which they have the knowledge and capabilities to create a sustainable advantage.

One critical step for a new fund is to consider what distinctive skills, experience, and networks it can use to create value. A larger institution, such as a bank, that sets up a fund may have expertise in a particular region, industrial sector, or deal structure. Some of Macquarie’s early funds, for example, had a tightly defined focus on highways, airports, or South Korea.

Focused strategies can be particularly effective for smaller players. In the late 1990s and early 2000s, for instance, investors with experience in the UK debt and project finance markets began building equity positions in infrastructure undertakings launched under the UK government’s Private Finance Initiative (PFI). These projects were too small for larger generalized investors—and for many of today’s new funds. But smaller, more specialized ones, such as the Secondary Market Infrastructure Fund (acquired last year by Land Securities Trillium), have successfully built up portfolios of positions in UK infrastructure projects.

Developing in-house expertise

In the short term, investors can outsource some operational and risk-management functions to advisers, just as private-equity firms do and as infrastructure investors themselves do for demand forecasting and for legal and taxation due diligence. They can also rely on coinvestors or subcontractors to provide advice.

Relying on coinvestors with industry experience, such as construction or facilities-management firms, is often a successful approach. Some of these relationships, notably the fruitful partnerships between Macquarie and Ferrovial, have endured across a number of deals. But funds should think twice before depending exclusively on industrial coinvestors for operational insights and advice. As the European road-management analysis mentioned earlier shows, no operating company can claim to be a market leader in every aspect of operations. Since similarly uneven patterns can be found in other areas of infrastructure, funds risk losing value by locking themselves into a single partner.

Moreover, investors relying solely on the operational expertise of construction and maintenance firms may expose themselves to conflicts of interest: these businesses often perform a dual role as shareholders in infrastructure projects (and thus receive dividends) and as operators performing specific tasks (and receive fees, like any other contractor). Rumors circulate that in early infrastructure deals, financial investors lost out to subcontractors they had relied on for operational guidance. At the very least, a fund must know a business well enough to hold the managers of the investment project and the contractors accountable no less for operational than for financial targets and to form an independent view of the operational improvements achievable.

Leading private-equity firms, such as Texas Pacific (TPG) and Kohlberg Kravis Roberts, have increasingly developed the expertise to carry out much of the core due diligence and operational governance themselves, so they can execute complex and operationally demanding transactions with confidence. Infrastructure players like Macquarie and Henderson’s Laing subsidiary have adopted the same approach; both can rely on significant teams of operational experts to undertake due diligence for deals and to support the management of projects.

Opportunities to invest in global transport and other types of infrastructure—to build and operate new projects and manage old ones—are set to increase in the next few years, but so will competition for deals. A fund can position itself to stay ahead of the competition and improve its chances of securing healthy returns if it deepens its knowledge of operations, improves its ability to assess the risks of individual deals and to manage them, and develops the in-house skills to institutionalize these capabilities.

Effective infrastructure investment: The public-sector perspective

More intense bidding for infrastructure projects generally increases the amounts paid to governments for the right to run existing assets and reduces the cost of constructing new ones. Yet overexuberant bidding can clash with the public’s best interests and undermine the provision of services. Governments should entrust such projects to smart investors who understand their operating realities and risks. Although public-private partnerships give governments strong protection if the private sector fails to deliver, failure is rarely painless for any of the parties involved. The UK’s National Physical Laboratory is a case in point. Built under the UK government’s Private Finance Initiative (PFI), the project went substantially over budget, creating serious financial difficulties for one of the investors. The public sector didn’t foot the bill for these problems, but the facility was delivered late as a result of its complex financial restructuring.

Source: https://www.mckinseyquarterly.com/Financial_Services/Investment_Management/How_investors_can_get_more_out_of_infrastructure_2105