Even with Monday’s 7.6% decline, China’s stock market is on a historic tear, having risen more than 50% over the past year. Yet much of this investor frenzy is based on three flawed premises: that China’s decelerating growth necessitates stimulus, that such stimulus will reduce borrowing costs for firms, and that lower borrowing costs will incentivize spending and ultimately jumpstart growth.
New data from my firm’s China Beige Book—the largest private study of China’s economy—belie each of those assumptions. Our data make it clear that China doesn’t desperately need to stimulate its economy, that its recent attempts to lower interest rates via stimulus have done the opposite, and that if Beijing opts for large-scale stimulus anyway, it won’t work as intended.
Market participants often seem to misunderstand what China’s slowdown means. While the economy has continued to decelerate broadly, important components—including profit performance and the labor market—have shown overall improvement since 2014’s second-quarter nadir. In the just-completed fourth quarter, China Beige Book data on sales, profits and job growth all looked a bit better, as they had in the third quarter. This is a tentative rebound, to be sure, but it is hardly the gloom and doom narrative that most commentators (glued to older data) have now accepted as gospel.
Recent “stimulus” measures, including November’s cut to the benchmark lending rate, haven’t reduced borrowing costs for firms. The opposite has happened. Since last year’s second quarter, according to our data, the cost of capital has risen across the board—for bank loans, shadow-bank loans and especially bonds.
Perhaps most frequently overlooked: Firms still don’t want to borrow. The share of firms applying for and receiving loans dropped again in the fourth quarter, to the lowest levels we have recorded since beginning to survey in the first quarter of 2012. Since then, the share of firms borrowing has now dropped by more than half.
Crucially, firms don’t want to spend either. In the fourth quarter, growth in capital expenditure ticked down for the fourth straight quarter, also notching our survey’s all-time low.
Even the fourth quarter’s best performers—services firms—are caught in the wave: In multiple regions this quarter, including those that house the critical cities of Shanghai, Guangdong and Chongqing, services firms saw improved revenue growth, yet the proportion that hiked capital expenditures dropped anyway, in some cases dramatically. If firms don’t want to spend, monetary stimulus is a lost cause.
Plummeting crude-oil prices are a reason for optimism, given that China is a huge net consumer of energy. Our data track a steady pattern of disinflation in the Chinese economy since the first quarter of 2013, with sales prices, wages and material-input costs all continuing to rise, but ever more slowly. With the impact of cheap oil yet to be felt, 2014’s disinflation could become outright deflation in 2015.
Producer deflation is much better for an economy than consumer deflation. But with the economy slowing, Japan undertaking record quantitative easing and the eurozone headed in that direction, any sort of deflationary headwind may make it awfully hard for Beijing to resist another large stimulus of its own.
Here we get to the critical takeaways for investors: China’s slowdown may create the illusion that China has little choice but to stimulate, but our data show otherwise. Yet even if such stimulus is ultimately enacted, it simply will not work as intended.
Firms haven’t been interested in borrowing or spending on new projects for a year now. It is possible that low enough interest rates could change their behavior but to date rates haven’t been pushed downward by easing measures.
Instead, what companies are most likely to do if more liquidity is injected into the system is jump deeper into the roaring stock market. Already some of the inflows into stocks have come from the floundering property sector that Beijing has tried to stabilize.
If more firms move capital into stocks, the result won’t be more growth but rather more out-of-control prices for equities. And the structural impediments that are slowing China down will remain untouched.
Source: http://www.wsj.com/articles/leland-r-miller-chinas-stimulus-quagmire-1421688876
Showing posts with label balance sheet recession. Show all posts
Showing posts with label balance sheet recession. Show all posts
Tuesday, January 20, 2015
Monday, September 10, 2012
Vietnam Loses Glow as a Market Darling
Until a few years ago, Vietnam was one of the world's hottest emerging markets. Now it faces an urgent task: fix a beleaguered banking system or watch its economy continue to slip behind faster-growing neighbors.
Piles of bad loans following the financial crisis have dragged down growth in Vietnam and left banks weakened and reluctant to lend.
The government recently acknowledged that nonperforming loans—many made to inefficient state-owned companies—could be as high as 10% of the banking system, substantially higher than reported by individual banks. Fitch Ratings analysts think the number is as high as 15%.
A record number of firms are declaring bankruptcy, and in the sprawling urban areas encompassing Hanoi and Ho Chi Minh City, the landscape is littered with stalled construction projects as builders run out of cash or put on the brakes as demand for condominiums and office space dries up.
Vietnam fought off rumors in recent days that it was seeking an International Monetary Fund bailout for its banking system. An IMF spokeswoman said no requests for aid had been made. State Bank of Vietnam Deputy Gov. Le Minh Hung said in a statement on the government's website that the country had no intention of seeking a rescue.
However, the IMF and others have been advising Vietnam on how to implement a domestically financed bailout that would restore its banks to health. In its latest economic review the fund said that "quick and comprehensive action" was needed to solidify weak banks and put the economy on more solid ground.
Fears over Vietnam's banks intensified in August when one of the country's most prominent tycoons, Nguyen Duc Kien, was arrested for allegedly improperly lending money to real-estate projects. Efforts to reach Mr. Kien, who now runs a number of private investment funds and owns Hanoi's main professional soccer club, have been unsuccessful. Stocks dropped in the days following the arrest, and the Ho Chi Minh Stock Index is down 18% since the beginning of May.
Vietnam shares fell 2.2% Monday, led by selling in property-related stocks after state media reports suggested real-estate developers are trying to cut prices to boost sales of apartments.
Song Da Thang Long Joint Stock Co. is among the local developers that have struggled. In July it secured an additional loan of 300 billion dong, or around $14 million, from the state-owned Bank for Investment and Development of Vietnam to help complete its sprawling, 13-tower U-Silk City development in Hanoi's suburbs. The project began in 2009 at the height of Vietnam's property boom but quickly fell victim to the subsequent property slump and soaring interest rates.
Some question whether this cash injection is enough to keep the project alive, and Song Da Thang Long's stock price has fallen about 60% in the past six months. Chairman Nguyen Tri Dung has said the firm is trying to arrange additional credit lines with other lenders. He couldn't be reached for comment.
Economists warn that Vietnam has entered a dangerous cycle where banks, saddled with bad debts, are unwilling to lend, making it harder for businesses to invest. That feeds into slower growth, which in turn makes it harder for companies to pay back loans, again harming the banks.
The result is that Vietnam's economy is likely to grow below its potential for years to come, unless stronger steps are taken to clean up the banks, economists say.
"I don't think there's any quick fix to a problem like this, as you see in the West. It takes time to work through a solution" to a banking crisis, says Gareth Leather, an economist at Capital Economics. He figures Vietnam's economy will grow at closer to a 5% rate in coming years than the 8% the country enjoyed through much of the previous decade. Although higher than growth rates in the West, 5% is considered slow for a developing Asian country like Vietnam and might not be fast enough to generate sufficient jobs to keep its growing population employed.
The government this month revised its forecast for 2012 growth down to 5.2% from 6% previously.
Vietnam's leaders have acknowledged that a fix is needed. Prime Minister Nguyen Tan Dung in March approved a three-year restructuring plan for the banking sector designed to strengthen the country's largest banks and encourage a series of mergers among smaller lenders, but officials appear uncertain about how to put the blueprint into effect.
Plans to launch a "bad bank" to buy up distressed assets have been discussed, but a foreign investor familiar with government discussions say implementing such a solution is being delayed by Hanoi's lack of expertise in managing a modern banking system.
People familiar with government plans say there are proposals to let foreign banks increase stakes in domestic banks from the current cap of 20% in some instances to as high as 49%. Another plan would allow majority stakes, but with a time limit of five years, after which the foreign banks would have to divest.
Government officials didn't respond to requests for comment.
It isn't clear if foreign banks will be interested in increasing their commitments without having the influence of being a permanent majority owner. There are more than a dozen foreign banks with stakes in domestic banks, including HSBC Holdings PLC, Australia & New Zealand Banking Group Ltd. and Société Générale.
Many of the foreign banks are dealing with troubles at home, and are said to be reluctant to double-down without assurances of more control over local partners. One foreign banker said at least some of the foreign banks are looking to exit Vietnam at the right price, rather than put more money in.
While the banking situation has deteriorated, Vietnam has tackled other problems by taming double-digit inflation and stabilizing its currency, in part through interest-rate increases. Vietnam has relatively little foreign debt and its trade deficit has shrunk this year.
Some think the government might be able to afford to run a bailout of its banks by itself. The government's debt-to-GDP ratio is about 44%, and the annual budget deficit has fallen to less than 4% of GDP last year from 9% in 2009, well below levels of financially strained economies in Europe.
But because of the large role the state plays in industry, the government has so-called contingent liabilities to back up debt in state-owned institutions. Fitch Ratings figures those liabilities equal an additional 10% of Vietnam's $125 billion GDP.
In the meantime, investors are waiting for more action to resolve the banking situation. Louis Nguyen, chief executive of Saigon Asset Management, which invests in a broad range of Vietnamese companies, said his firm tried to launch a fund last year in conjunction with a large Vietnamese bank to invest in problem loans.
But the fund was put on hold when he found the banks were unwilling to acknowledge problems on their books and sell loans at any sort of discount to their face value.
Source: http://online.wsj.com/article/SB10000872396390443779404577643220089349912.html?mod=googlenews_wsj
Piles of bad loans following the financial crisis have dragged down growth in Vietnam and left banks weakened and reluctant to lend.
The government recently acknowledged that nonperforming loans—many made to inefficient state-owned companies—could be as high as 10% of the banking system, substantially higher than reported by individual banks. Fitch Ratings analysts think the number is as high as 15%.
A record number of firms are declaring bankruptcy, and in the sprawling urban areas encompassing Hanoi and Ho Chi Minh City, the landscape is littered with stalled construction projects as builders run out of cash or put on the brakes as demand for condominiums and office space dries up.
Vietnam fought off rumors in recent days that it was seeking an International Monetary Fund bailout for its banking system. An IMF spokeswoman said no requests for aid had been made. State Bank of Vietnam Deputy Gov. Le Minh Hung said in a statement on the government's website that the country had no intention of seeking a rescue.
However, the IMF and others have been advising Vietnam on how to implement a domestically financed bailout that would restore its banks to health. In its latest economic review the fund said that "quick and comprehensive action" was needed to solidify weak banks and put the economy on more solid ground.
Fears over Vietnam's banks intensified in August when one of the country's most prominent tycoons, Nguyen Duc Kien, was arrested for allegedly improperly lending money to real-estate projects. Efforts to reach Mr. Kien, who now runs a number of private investment funds and owns Hanoi's main professional soccer club, have been unsuccessful. Stocks dropped in the days following the arrest, and the Ho Chi Minh Stock Index is down 18% since the beginning of May.
Vietnam shares fell 2.2% Monday, led by selling in property-related stocks after state media reports suggested real-estate developers are trying to cut prices to boost sales of apartments.
Song Da Thang Long Joint Stock Co. is among the local developers that have struggled. In July it secured an additional loan of 300 billion dong, or around $14 million, from the state-owned Bank for Investment and Development of Vietnam to help complete its sprawling, 13-tower U-Silk City development in Hanoi's suburbs. The project began in 2009 at the height of Vietnam's property boom but quickly fell victim to the subsequent property slump and soaring interest rates.
Some question whether this cash injection is enough to keep the project alive, and Song Da Thang Long's stock price has fallen about 60% in the past six months. Chairman Nguyen Tri Dung has said the firm is trying to arrange additional credit lines with other lenders. He couldn't be reached for comment.
Economists warn that Vietnam has entered a dangerous cycle where banks, saddled with bad debts, are unwilling to lend, making it harder for businesses to invest. That feeds into slower growth, which in turn makes it harder for companies to pay back loans, again harming the banks.
The result is that Vietnam's economy is likely to grow below its potential for years to come, unless stronger steps are taken to clean up the banks, economists say.
"I don't think there's any quick fix to a problem like this, as you see in the West. It takes time to work through a solution" to a banking crisis, says Gareth Leather, an economist at Capital Economics. He figures Vietnam's economy will grow at closer to a 5% rate in coming years than the 8% the country enjoyed through much of the previous decade. Although higher than growth rates in the West, 5% is considered slow for a developing Asian country like Vietnam and might not be fast enough to generate sufficient jobs to keep its growing population employed.
The government this month revised its forecast for 2012 growth down to 5.2% from 6% previously.
Vietnam's leaders have acknowledged that a fix is needed. Prime Minister Nguyen Tan Dung in March approved a three-year restructuring plan for the banking sector designed to strengthen the country's largest banks and encourage a series of mergers among smaller lenders, but officials appear uncertain about how to put the blueprint into effect.
Plans to launch a "bad bank" to buy up distressed assets have been discussed, but a foreign investor familiar with government discussions say implementing such a solution is being delayed by Hanoi's lack of expertise in managing a modern banking system.
People familiar with government plans say there are proposals to let foreign banks increase stakes in domestic banks from the current cap of 20% in some instances to as high as 49%. Another plan would allow majority stakes, but with a time limit of five years, after which the foreign banks would have to divest.
Government officials didn't respond to requests for comment.
It isn't clear if foreign banks will be interested in increasing their commitments without having the influence of being a permanent majority owner. There are more than a dozen foreign banks with stakes in domestic banks, including HSBC Holdings PLC, Australia & New Zealand Banking Group Ltd. and Société Générale.
Many of the foreign banks are dealing with troubles at home, and are said to be reluctant to double-down without assurances of more control over local partners. One foreign banker said at least some of the foreign banks are looking to exit Vietnam at the right price, rather than put more money in.
While the banking situation has deteriorated, Vietnam has tackled other problems by taming double-digit inflation and stabilizing its currency, in part through interest-rate increases. Vietnam has relatively little foreign debt and its trade deficit has shrunk this year.
Some think the government might be able to afford to run a bailout of its banks by itself. The government's debt-to-GDP ratio is about 44%, and the annual budget deficit has fallen to less than 4% of GDP last year from 9% in 2009, well below levels of financially strained economies in Europe.
But because of the large role the state plays in industry, the government has so-called contingent liabilities to back up debt in state-owned institutions. Fitch Ratings figures those liabilities equal an additional 10% of Vietnam's $125 billion GDP.
In the meantime, investors are waiting for more action to resolve the banking situation. Louis Nguyen, chief executive of Saigon Asset Management, which invests in a broad range of Vietnamese companies, said his firm tried to launch a fund last year in conjunction with a large Vietnamese bank to invest in problem loans.
But the fund was put on hold when he found the banks were unwilling to acknowledge problems on their books and sell loans at any sort of discount to their face value.
Source: http://online.wsj.com/article/SB10000872396390443779404577643220089349912.html?mod=googlenews_wsj
Friday, April 27, 2012
Reshaping banking: The retreat from everywhere
SOME signs are subtle. Foreign lenders operating in America are tightening loan standards more sharply than domestic rivals; Hong Kong property developers are scrambling to issue bonds for want of other funding. But others—the “for sale” signs hung on the overseas assets of many European lenders—are pretty blatant. The ability and willingness of banks to compete across borders is unravelling.
The years before the financial crisis saw rapid growth in the cross-border activities of banks. According to the Bank for International Settlements, the average year-on-year growth rate for cross-border bank credit to non-banks during the 2000-07 period was a sizzling 15.2%, compared with 6.7% for total bank credit. Since then cross-border credit has fizzled (see chart 1) and looks likely to fall further.
European lenders were in the vanguard during the era of internationalisation, and around a third of their assets are outside their home markets. They are now under pressure to slim down their balance-sheets quickly, partly to shore up capital and partly because of funding strains. The IMF this week projected that banks in the European Union would undergo a $2.6 trillion deleveraging over the next two years. Much of that will be achieved by running for home.
In March the Reserve Bank of Australia revealed that the departure of European lenders, in particular French banks, had left an A$34 billion ($35 billion) funding gap in the syndicated-loan market for local companies. The story is similar in the Middle East, where a rush this year to issue Islamic bonds, or sukuk, is attributed to a withdrawal of European lenders. Within Europe, too, national boundaries are being reinforced as lenders cut back their exposures to weaker markets (see chart 2). Non-European banks are also trimming their foreign portfolios as they rationalise their businesses: Citigroup agreed to sell its Belgian retail arm in December; HSBC is offloading businesses from Costa Rica to Pakistan.
Some of this is cyclical. After the first contraction of international activity in 2008-09, a rebound occurred, and something similar might be seen in response to the provision late last year of three-year liquidity by the European Central Bank (ECB), which has temporarily eased the strains on euro-area banks. But there is good reason to believe the retrenchment represents a structural change.
Retrenchment need not be disastrous. Much pre-crisis cross-border lending was foolish, after all; think of all the German money in subprime American mortgages. And foreign banks are not the only suppliers of cross-border capital: the importance of foreign direct investment and portfolio flows as a proportion of gross inflows has steadily risen over the past three decades.
But banks matter. There is evidence that cross-border banking relationships between pairs of countries encourage other types of capital flow; reduce them, and the other flows may dry up too. And the availability of bank financing is vital to smaller businesses or long-term asset-based activities such as infrastructure projects. “The alternatives to cross-border banking are autarkic financial systems, which means relying on domestic capital formation and thus higher costs, or international flows via bond markets, which are more volatile,” says Peter Sands, the boss of Standard Chartered, an emerging-markets bank.
Home is where the taxpayer is
Three powerful centripetal forces are at play: politics, regulation and deleveraging. Take politics first. The financial crisis, and the sovereign-debt crisis that followed it, have left no one in any doubt about the relationship between banks and the state. If big lenders get into trouble, taxpayers end up bailing them out.
Now it is payback time. Banks have come under pressure from their governments to prioritise the customers that rescued them. “Project Merlin” set Britain’s biggest banks targets for their lending to small and medium-sized enterprises; Commerzbank, a bailed-out German bank, is committed to concentrating its lending on Germany and Poland. In December Crédit Agricole, a French bank, outlined plans that included the closure of corporate- and investment-banking operations in 21 countries. “Crédit Agricole is mobilised on a day-to-day basis to support the plans of the French people,” ran the press release.
In the case of banks in the euro zone’s peripheral nations, the politics of patriotism also mean propping up the debt of their governments. Italian and Spanish banks have used the ECB’s three-year loans to boost their holdings of domestic government bonds. Spanish lenders increased their holdings by 26% in the two months to January; Italian banks upped theirs by 31% in the three months to February. This reflects, in part, a calculation that few banks can survive without a sovereign that looks solvent.
Regulations are also steering banks (and insurers) into holding domestic government debt. Rules on capital and liquidity label government debt as safe and render domestic government debt peculiarly so. The overall effect is to make balance-sheets look a lot more patriotic. Huw van Steenis of Morgan Stanley reckons that euro-zone banks have an average of 6% of their assets invested in domestic sovereign debt, and that their holdings are growing by the day.
Many other rules that are designed to make finance safer also risk making it more parochial. A big lesson of the crisis is that banks which are global in life are national in death. The bankruptcies of Lehman Brothers and MF Global showed regulators how assets could easily get trapped in foreign jurisdictions, leaving a bigger bill for taxpayers back home. There are signs that, in response, regulators are treating foreign assets more harshly than domestic ones. Bankers say that stress tests carried out on American lenders by the Federal Reserve in March put their foreign loans under greater pressure than American ones. Recent guidance from Britain’s Financial Services Authority on lending in areas like commercial property jacked up risk charges on exposures where there is a lack of historical data; Bob Penn of Allen & Overy, a law firm, argues that this has the effect of privileging lending in home markets. With capital scarce, such tinkering matters.
As national regulators seek to stamp their authority on international finance, conflicts and inefficiencies arise in all sorts of areas. Britain has filed lawsuits against the ECB for its proposal to prohibit clearing-houses outside the euro area from being able to handle more than 5% of trading in euro-denominated instruments. Differences between proposed American and European rules on derivatives may mean that banks build separate infrastructures on either side of the Atlantic. Things that matter could fall into the cracks opening up; many worry that trade finance, the lifeblood of cross-border trade, will be heavily penalised under new liquidity rules.
Resolutions and reality
Planning for bank failures is the area where the interests of national regulators collide most forcefully with hopes of international co-ordination. The Financial Stability Board, a global watchdog, wants the big regulators of cross-border banks to work together in the event that banks need resolving, and many banks hope for such agreements. But the regulators’ focus is on their national interests, not those of the world, or of the banks.
As Simon Gleeson of Clifford Chance, a law firm, points out, no government will care as much about treating foreign creditors fairly as it cares about compensating its own people. Iceland, which screwed its banks’ foreign creditors in favour of domestic depositors, is a case in point. A typical regulator wants banks in its purview to have enough assets both to keep operating in times of crisis and to pay back domestic creditors in case of failure, whether the banks are domiciled there or not.
Home-market regulators thus prefer their lenders not to have too great an exposure elsewhere. Austria’s central bank has said that Austrian bank subsidiaries in central and eastern Europe should not exceed a loan-to-deposit ratio of 110%, a way of ensuring that their funding needs do not make too great a call on resources back at headquarters.
Emerging markets, now alive to the possibility that parent banks in the rich world can be a source of instability as well as support, have their own worries about the “portability” of capital, liquidity and assets. Guillermo Ortiz, a former Mexican finance minister who is now chairman of Banorte, a Mexican lender, wants subsidiaries of foreign banks in emerging markets to be ring-fenced so that money cannot be funnelled out of the country.
Particular problems attach to “living wills”, documents in which banks lay out for regulators their plans to survive periods of extreme stress and, if the worst happens, to provide supervisors with the information they need for resolution. The process of agreeing on living wills with regulators in the countries concerned creates pressure for banks to use subsidiaries abroad, which have to have their own capital, rather than branches, which don’t.
The decision to set up a subsidiary in a new market (as opposed to just opening a branch) may be a harder one for boards, since it involves legal incorporation and taking on personal liabilities. Some bankers worry, too, that subsidiary units may be nudged by supervisors into running separate IT and management systems in order to demonstrate that they can keep operating without the support of a parent, making them yet more inefficient. Rules that make it harder to move money around will make it harder to commit to distant opportunities. An executive at a big American bank says that such rules will force his firm to invest less abroad than would be ideal. For emerging markets that have shallow deposit bases and undeveloped domestic bond markets, it all adds up to slower credit growth.
Markets that erect firewalls around their banking systems may also be sacrificing resilience in the event of a future crisis. For all the worries about wobbly international banks, the support of Western parents has proved more helpful than not in eastern Europe so far. Other sources of finance can be flighty, too. When bond markets closed to Dubai in late 2009, international banks kept providing liquidity. “There is a trade-off here between probability of default and loss given default,” says Standard Chartered’s Mr Sands. “People are losing sight of the first and obsessing about the second.”
The LDR of the pack
Even if regulators and politicians were carefree onlookers, the need to deleverage would remain. Once again, Europe is home to the banks with the most work to do, less because of the need to raise more capital than because of the way they fund themselves. European banks are more reliant on wholesale markets than any other big banking system (see chart 3). According to Simon Samuels of Barclays Capital, lending by listed European banks exceeds their deposits by $1.3 trillion. American banks, by contrast, are awash in deposits, with a funding surplus of $1.3 trillion.
The European gap is filled by borrowing on wholesale markets. The capital markets have peeped open in the wake of the ECB’s three-year lending operations. But a peep is not enough. The ECB’s intervention was needed precisely because the euro-zone sovereign crisis and the increased need to factor in the losses that follow when a bank fails have left bond investors a lot less interested in holding bank debt than they were. So lenders have little choice but to bring down their wholesale-borrowing needs.
In practice, that often means pruning back activities abroad. Banks typically establish a presence in new markets by lending, and wait for deposits to catch up later. Foreign subsidiaries that have loan-to-deposit ratios (LDRs) in excess of 100% and that rely on cross-border funding from their parents are obvious deleveraging candidates. Eastern Europe is the region that looks most vulnerable on this score. It is the most reliant on foreign banks; and although those banks also raise local deposits, countries such as Hungary, Romania and the Baltic states are all big recipients of cross-border funding as well (see chart 4).
European banks are not about to shut down their foreign networks altogether, not least because the business they do abroad is often their best prospect of growth. Lenders are more likely to manage LDRs down by letting loans run off or by competing for more deposits than to pull out of countries altogether. But the effect will still be felt in the form of scarcer and dearer credit.
There is a faster route to funding salvation than reducing bread-and-butter commercial lending. One particularly striking feature of the pre-crisis expansion of Europe’s banks was that so much of their activity was in dollar-denominated areas such as commercial-property lending, leveraged buy-outs, syndicated loans and commodity financing.
Some of that dollar activity was funded by deposits gathered by banks’ American units; another wodge of dollar funding came from swapping local deposits into foreign currency. But lots was gathered on wholesale markets, often in the form of short-term debt that needed to be constantly rolled over (think of the money provided to French banks by American money-market funds, whose flight from Europe last year caused so much trouble). This type of funding—short-term, wholesale and with an added dollop of foreign-currency risk for good measure—could not be further removed from the liabilities lenders, or their regulators, now want. With French banks in the vanguard, they are offloading dollar-denominated assets.
Among the sectors most exposed to this retreat are project finance, asset-based lending in shipping and aviation, and infrastructure funding. These are areas where assets tend to remain on banks’ balance-sheets for 10-15 years or more. That makes them unattractive bets: long-term dollar funding is hard to come by; short-term funding presents rollover risk; and lenders are wary of locking up bits of their balance-sheets inflexibly when things are so uncertain. To make matters worse, risks are high, so these kinds of lending use up lots of capital.
Alternatives to bank finance are harder to come by in these areas than in areas like syndicated lending. The risks inherent in shipping, a notoriously cyclical industry, or infrastructure finance, where there is lots of construction risk, mean that credit ratings are low, making them a hard sell to bond investors. New regulations called Solvency 2 could make it harder for European insurers to hold long-dated assets. Bankers are now trying to cook up new ways of distributing such assets to investors. One option in infrastructure finance, says the boss of a big European bank, is for the bank to offer financing for the riskier construction phase and then hand over to bond markets when projects start to generate cash flows (although it is unclear what yield investors would demand in return).
The hidden harm
Such innovations are a reminder that the international financial system has many moving parts. New ways of securitising dollar-denominated assets could mean that banks end up slimming their balance-sheets more slowly. The homeward migration of European lenders opens the door to others: Japanese banks, which sit on a surplus of deposits and are willing to lend on a long-term basis, are now the first port of call for project-finance deals. Banks of no fixed abode, such as HSBC and Standard Chartered, may also be poised to benefit in some markets, and American banks could yet decide to become more expansionist. Corporate-bond markets provide another source of funding for larger firms.
But, for all this, a homeward bias in banking will raise costs for some countries, and some classes of client, a lot. Where the process of retrenchment is too swift, it will be hard to refinance some existing debts. Ring-fenced subsidiaries risk being more brittle in the event of a crisis. The costs of infrastructure finance will go up and its availability decline.
There may also be costs for markets that have previously exported deposits and are now seeing them return: some in Germany already worry that too much credit is sloshing around. Some of the forces pulling banks back home are reasonable ones. But once trillions of dollars are set in motion, getting them to settle back down in an optimal way is next to impossible.
Tuesday, March 20, 2012
Ngân hàng loay hoay tìm doanh nghiệp vay vốn
Tìm cách cho vay để bớt đọng vốn Phó tổng giám đốc một ngân hàng nhỏ cho biết ngân hàng ông hiện vẫn có đến 1.000 tỉ đồng dành riêng để cho vay doanh nghiệp. Mức lãi suất dao động từ 18-20%, tuy vậy ông cho biết trong cả tháng qua nhân viên tín dụng đã tìm kiếm khách hàng để cho vay nhưng không được là bao. Theo vị này, với mức lãi suất như trên nếu so với ngân hàng có vốn nhà nước hay ngân hàng nước ngoài thì không thể cạnh tranh, trong khi đó, các doanh nghiệp có hồ sơ tốt thường liên hệ với các ngân hàng trên để vay. “Cũng có một số doanh nghiệp có nhu cầu nhưng khi xét hồ sơ thì không đủ tiêu chuẩn”, vị này cho biết. Ông cho biết thêm số tiền trên hiện đang dùng để đầu tư ngắn hạn và chờ để cho doanh nghiệp vay. Với chỉ tiêu tăng trưởng tín dụng trong năm nay được Ngân hàng Nhà nước giao là 8%, ông còn cho rằng chưa chắc ngân hàng sẽ đạt được mức tăng trưởng như trên trong năm nay. Giám đốc khối khách hàng doanh nghiệp một chi nhánh tại TPHCM của Ngân hàng Quốc tế (VIB) cũng cho biết, trong thời gian này, ngân hàng ông đang tìm doanh nghiệp để cho vay, và tranh thủ giải ngân vốn. Tuy vậy, để tìm được doanh nghiệp đủ khả năng là không dễ vì các rủi ro đến với doanh nghiệp trong thời gian này là rất cao, khiến cho ngân hàng nếu không thận trọng thì nợ quá hạn sẽ gia tăng. Đa phần các báo cáo tài chính mà doanh nghiệp chuyển đến đều được ngân hàng xem xét kỹ càng và giải ngân đúng theo nhu cầu chứ không theo số vốn đề nghị của doanh nghiệp. Hiện tại VIB đang đưa ra nhiều gói hỗ trợ cho doanh nghiệp xuất nhập khẩu, thực phẩm đồ uống, với lãi suất ưu đãi, thấp hơn 1,5 điểm phần trăm so với mức cho vay thông thường. Từ đầu tháng 3, Ngân hàng Phương Đông cũng triển khai cho nhân viên tín dụng tại các chi nhánh về việc tích cực mời gọi khách hàng vay vốn. Ngân hàng này cũng đã giảm lãi suất xuống còn 18%/năm cho các khoản vay trong vòng 1 năm. Theo nhân viên tín dụng của ngân hàng này, việc xét cho vay sẽ được thực hiện tỉ mỉ và cân nhắc hơn, để tránh tăng thêm nợ xấu cho ngân hàng, trong khi việc thu hồi nợ trong điều kiện hiện tại rất khó. Theo thông tin từ OceanBank, ngân hàng này đang áp dụng các chương trình ưu đãi đối với các doanh nghiệp, hợp tác xã, hộ gia đình, cá nhân… hoạt động trong lĩnh vực nông nghiệp, nông thôn, lâm, ngư nghiệp, diêm nghiệp… nhằm phục vụ phát triển nông nghiệp, nông thôn với lãi suất thấp hơn 2- 3%/năm so với biểu lãi suất cho vay thông thường tại OceanBank. Đồng thời ngân hàng vừa quyết định dành một gói tín dụng ưu đãi trị giá 500 tỉ đồng với lãi suất cho vay khoảng 17%/năm cho một doanh nghiệp ở phía nam. Trao đổi với Thời báo Kinh tế Sài Gòn Online, chuyên gia tài chính Lê Xuân Nghĩa cho rằng, hiện tại vốn ở các ngân hàng đang dư thừa, không tìm được khách hàng vay. Điều này đã dẫn đến nhiều ngân hàng bỏ tiền mua trái phiếu chính phủ, kỳ hạn dưới 5 năm với lãi suất khoảng 11%/năm. Theo số liệu của Công ty chứng khoán Bảo Việt, tính đến hết ngày 9-3, tổng giá trị giao dịch toàn thị trường của trái phiếu đạt 47.575 tỉ đồng, trong khi cả năm 2011, con số này chỉ là hơn 73.000 tỉ đồng. Bảo Việt cũng cho rằng ngân hàng thương mại là đối tượng chủ yếu mua trái phiếu trong thời gian qua. Trong buổi họp báo công bố giảm lãi suất huy động ngày 13-3, Thống đốc Ngân hàng Nhà nước Nguyễn Văn Bình cũng cho biết, tính đến ngày 8-3, tỷ lệ tăng trưởng tín dụng đã giảm 1,27% so với cuối năm 2011. Thống đốc Ngân hàng Nhà nước lý giải rằng do yếu tố mùa vụ trong sản xuất kinh doanh ở kỳ nghỉ Tết Nguyên đán và tiếp đó, nhu cầu vay vốn còn hạn chế khiến cho dư nợ tín dụng giảm. Lãi suất vay giảm chưa đáng kể Trong khi ngân hàng đang tìm mọi cách để mời gọi doanh nghiệp vay vốn, thì trong buổi tọa đàm về tiếp cận vốn ngân hàng do Thời báo Kinh tế Sài Gòn tổ chức vào hôm 12-3, đa phần các doanh nghiệp tham dự đều cho rằng lãi suất hiện vẫn còn cao, nếu vay kinh doanh thì không có lãi. Đại diện các doanh nghiệp có mặt cho rằng mức lãi suất huy động giảm 1 điểm phần trăm, dẫn đến việc lãi suất cho vay giảm 1-2 điểm phần trăm tại một số ngân hàng chưa phải là mong muốn của doanh nghiệp vì mức giảm này không đáng kể. Theo bà Lê Thị Kim Thư, Giám đốc Kinh doanh Công ty Owtex Thiên Hòa , mức lãi suất trên dù giảm vẫn quá cao đối với doanh nghiệp, và mức lãi suất hợp lý mà công ty có thể chấp nhận được vào khoảng 8%. Bà Thư cho biết, hiện tại việc vay vốn chủ yếu để duy trì sản xuất, đảm bảo công ăn việc làm cho công nhân, không dám nghĩ đến lợi nhuận. Vì cái khó của doanh nghiệp hiện nay là tiêu thụ hàng, nếu tăng giá thì tồn kho sẽ tăng nên công ty cũng không dám đưa tất cả chi phí vào giá bán. Trong khi đó, ông Phan Văn Dũng, Tổng giám đốc Công ty cổ phần Thép Hữu Liên Á Châu, cho biết việc lãi suất cho vay được giảm xuống 1 điểm phần trăm thì sẽ giúp công ty ông tăng thêm được 5% lợi nhuận trên vốn chủ sở hữu. Vì vậy, việc giảm lãi suất là rất quan trọng, nhưng ông Dũng cũng cho biết, khi lãi suất giảm xuống còn 12% thì doanh nghiệp mới có thể có lãi. Còn ông Nguyễn Trí Kiên, Tổng giám đốc Công ty Túi xách Minh Tiến, cho rằng hiện tại doanh nghiệp nhỏ có ba cái khó: tiếp cận được vốn ngân hàng, được vay với lãi suất thấp và có thêm các chính sách hỗ trợ của Chính phủ để vượt qua những khó khăn hiện tại. Ông Kiên nói mức lãi suất trên đang bào mòn lợi nhuận của doanh nghiệp. Theo ông Kiên, vấn đề quan trọng hiện nay là nhà nước nên điều chỉnh dòng vốn chảy vào các doanh nghiệp sản xuất, kinh doanh, các nơi tạo ra giá trị thặng dư cao cho cả nền kinh tế. Lãi suất giảm mới chỉ đến được với doanh nghiệp lớn còn doanh nghiệp nhỏ và vừa dù cho nằm trong đối tượng ưu tiên cho vay vốn vẫn chưa được hưởng. “Như vậy, liệu việc giảm lãi suất có tạo ra tác động tích cực cho nền kinh tế hay chưa, trong khi doanh nghiệp nhỏ và vừa đóng góp một phần không nhỏ trong việc tạo ra tiền cho nền kinh tế và công ăn việc làm cho xã hội”, ông Kiên đặt câu hỏi. Ông Võ Thanh Liêm, Tổng giám đốc Công ty TNHH Nguồn Sinh Thái, cho biết hiện tại doanh nghiệp “thở đến đâu hay đến đó”, không dám mở rộng sản xuất vì không có vốn. Nếu phải vay vốn ngân hàng với lãi suất 17- 18% thì xem như hoạt động kinh doanh sẽ không còn mang lại lợi nhuận. Ông Liêm cho rằng, hiện tại doanh nghiệp phải tái cấu trúc mình để tìm được vốn, nhưng ngân hàng cũng phải xây dựng đội ngũ thẩm định dự án cho chuyên nghiệp, chính xác, trung thực thì mới mong vốn rót vào đúng chỗ, không ảnh hưởng tiêu cực đến cơ cấu nợ của ngân hàng, và ngân hàng sẽ mạnh dạn cho vay hơn. |
Wednesday, March 7, 2012
Why the ‘risk-on’ rally will not last
The recent rally in global markets has been led by what most investors are now calling “risk-on” assets. Their counterparts, risk-off assets, have lagged. We question the longevity of this risk-on trade. Indeed, we believe that the secular investment theme remains risk-off.
Investors use the hackneyed term risk-on to refer to assets that have tended to outperform when investors are bullish. Commodities, real estate and emerging markets would be prime examples. Risk-off assets are perceived haven assets such as US Treasuries, German Bunds, the US dollar and even US stocks.
Yet few investors seem to understand the implied economic forecasts of the risk-on/risk-off trades. Our research shows that risk-on assets’ outperformance during the 2000s was directly related to the inflation of the global credit bubble. The most popular investments during the decade were all credit-related investments. When one buys risk-on assets, therefore, one assumes that the deflation of the global credit bubble will subside and that credit will again expand. The implied forecast of a risk-off trade is the exact opposite, ie, that the credit bubble will continue to deflate.
During 2009-10, it was widely thought that the deflating credit bubble was solely a US problem, and that economies in the remainder of the world were still healthy. Consensus at the time was that the US was de-basing the dollar, and the euro would soon be an alternative reserve currency. In 2011, investors fully realised that there were credit problems in Europe too, and talk of the euro becoming a reserve currency ended.
Despite 2011’s dismal emerging markets equity performance, investors continue to believe that the emerging markets are largely immune to the developed world’s credit hangover. But cycles often begin in the US, travel to Europe and then end up in the emerging markets. This cycle will likely follow that historical precedent. The emerging markets’ difficult tugs-of-war between inflation and growth indicate that the emerging markets, rather than decoupling from the developed world, were perhaps the biggest beneficiaries of the global credit bubble.
If risk-on assets are credit-related assets, then it follows they should outperform when credit is expected to expand, and underperform when credit is expected to contract. Accordingly, we expect risk-on assets’ outperformance to be periodic when policymakers attempt to reinflate the global credit bubble. Risk-on assets outperformed subsequent to the Federal Reserve’s attempts to stymie US financial sector consolidation, and they have been outperforming more recently as the European Central Bank made moves to thwart European bank consolidation.
The question is whether policymakers can fully alleviate the effects of a deflating global credit bubble. Longer-term investors should be sceptical.
Bubbles create overcapacity within an economy. For example, towns were formed during the California gold rush in the 1800s as the population of California swelled with hopeful prospectors. These became ghost towns once the gold bubble subsided and people moved elsewhere to find more productive work.
During credit bubbles, overcapacity builds on bank balance sheets. When credit bubbles deflate, bloated bank balance sheets are no longer a productive use of assets, and they inevitably contract. The only uncertainties are the means and the speed of balance sheet contraction. Economic history shows that the faster bubble-produced overcapacity is reduced, the quicker economies rebound. Economists, therefore, generally prefer speed in capacity rationalisation because they want assets to be used more efficiently. Politicians abhor such speed because it often means job losses and weak voter confidence.
The performance see-saw between risk-on and risk-off assets reflects this fight between economic and political realities. When policymakers take actions to attempt to counteract the economic reality that bank balance sheets must contract (as the ECB has recently done), then risk-on assets outperform.
But economic history is also full of stark reminders that bubbles cannot be reinflated despite best attempts of politicians to soften the blows of consolidation and deflation. When these economic realities prove more powerful than policy, the risk-off trade outperforms.
Could the secular investment theme for the 2010s indeed be risk-on? We doubt it. Risk-on assets’ performance during the 2000s was propelled by credit. The global economy is now on the downside of a credit bubble, the full effect of which has yet to be felt in places such as emerging markets. The history of financial bubbles and their subsequent deflation seem to favour the secular underperformance of risk-on assets.
Risk-off assets will likely be the secular investment theme of the 2010s. US-based assets (both stocks and bonds) continue as our favourites. In fact, this significant secular shift is already under way. Despite the recent attention-grabbing rally in risk-on assets, the S&P 500 has outperformed Bric equities for more than four years.
Source: http://www.ft.com/intl/cms/s/0/b2656e54-5f06-11e1-9df6-00144feabdc0.html#axzz1oV10N64R
Thursday, February 16, 2012
Watch out as sovereigns eye company cash piles
Much has been written about how the developed world must tackle its structural budget deficits. But the link that remains to be properly recognised is that the counterparts to those ‘unsustainable’ public-sector budget deficits are equally ‘unsustainable’ corporate-sector surpluses.
The conventional wisdom believes that the current sovereign debt crisis is the result of governments having been too profligate. But it is not that governments have been spending ‘too much’ that is the problem; it is that corporates have been spending ‘too little’. Moreover, because this corporate saving is the main counterpart to the government’s borrowing, until companies start to spend again, the burden of fiscal adjustment will have to fall on cutbacks in public services and higher personal taxation. It is time to shift the debate away from talking about the fiscal position, and focus instead on whether it is a shift in corporate behaviour that is responsible for the fiscal mess in the developed world.
It is very unusual for the corporate sectors to run sustained financial surpluses. Look back at the UK and the US for more than half a century and the corporate sector has tended to be a net borrower, not a net saver.
What has prompted the recent move into financial surplus has been the decision by companies to step away from investment. Investment-to-gross domestic product ratios in the developed world are now close to the lowest levels seen in 60 years. Corporates appear to have decided to run themselves for cash, and not for growth. It is this profound shift in corporate behaviour that policymakers and politicians have been slow to spot. Until this behaviour changes – or is changed – it will be very hard to improve the fiscal arithmetic.
Now this could be a simple cyclical issue. Corporates – like investors – were seduced into believing that the great moderation was the new normal… only to find themselves thrown into a world of unprecedented uncertainty by the credit crunch. Faced with such a loss of visibility and a shortage of external finance, chief executives had no option but to put fixed investment on hold, and de-lever in order to reduce their dependence on the banks. The hope is that as confidence returns, so will fixed investment and job creation, followed in turn by an improvement in public finances. Policymakers should be doing all they can to bring corporates back from a world dominated by uncertainty and into a world where investment plans can be made and risks managed.
But what if the shift in corporate behaviour is structural?
After all, it is rare to have a capital expenditure cycle without a credit cycle. And where is the next credit cycle going to come from if the banks are condemned to multi-year de-leveraging? Besides, if there is any capital expenditure to be done, it is most likely that this will take place in the emerging-market economies rather than in the developed world.
Against this backdrop, it must be tempting for company managements to run the company for cash, with an aggressive share buy-back programme that will help management’s stock options to vest, a growing dividend to keep equity-income fund managers happy, and a compensation committee that makes sure the right people are paid. The kerfuffle over executive pay and rising levels of inequality is not happening in a vacuum; it could be symptomatic of ‘rent-seeking’ behaviour by corporates.
If global business leaders feel there is a growing gulf between the business agenda and the political agenda, it is because corporates are in rude financial health while governments are under the cosh. With politicians at the limit of what they can impose on their electorate, do not be surprised if they turn to those that have the cash. Trailing earnings (in US dollars) of the global quoted corporates are now back to pre-crash levels, while capital expenditure, employment and tax receipts are not, leaving corporates on the defensive. As US presidential hopeful Mitt Romney put it: “Don’t attack the private sector. Don’t attack risk-takers. Don’t attack profit. Profit, by the way, is what allows businesses to hire people and grow.” Many are now questioning whether that is still the case.
In the Reagan-Thatcher era, politicians cut taxes so that companies would come to their country, invest, create jobs … so that those politicians could, in turn, be re-elected. It does not work like that anymore; globalisation has seen to that. The reality is that public services used by the ‘99 per cent’ are taking the strain, while attractive corporate tax regimes are protected. Just as the trade-union barons of the 70s failed to see the writing on the wall, so the global captains of industry may suffer a similar fate unless they put their cash to work in the countries in which they are domiciled.
Source: http://www.ft.com/intl/cms/s/0/bf2b5e92-50be-11e1-8cdb-00144feabdc0.html#axzz1mYi1Q0j0
Tuesday, January 24, 2012
Working out of debt
The deleveraging process that began in 2008 is proving to be long and painful. Historical experience, particularly post–World War II debt reduction episodes, which the McKinsey Global Institute reviewed in a report two years ago, suggested this would be the case.1 And the eurozone’s debt crisis is just the latest demonstration of how toxic the consequences can be when countries have too much debt and too little growth.
We recently took another look forward and back—at the relevant lessons from history about how governments can support economic recovery amid deleveraging and at the signposts business leaders can watch to see where economies are in that process. We reviewed the experience of the United States, the United Kingdom, and Spain in depth, but the signals should be relevant for any country that’s deleveraging.
Deleveraging: Where are we now?
The financial crisis highlighted the danger of too much debt, a message that has only been reinforced by Europe’s recent sovereign-debt challenges. And new McKinsey Global Institute research shows that the unwinding of debt—or deleveraging—has barely begun. Since 2008, debt ratios have grown rapidly in France, Japan, and Spain and have edged downward only in Australia, South Korea, and the United States. Overall, the ratio of debt to GDP has grown in the world’s ten largest economies.
Overall, the deleveraging process has only just begun. During the past two and a half years, the ratio of debt to GDP, driven by rising government debt, has actually grown in the aggregate in the world’s ten largest developed economies (for more, see sidebar, “Deleveraging: Where are we now?”). Private-sector debt has fallen, however, which is in line with historical experience: overextended households and corporations typically lead the deleveraging process; governments begin to reduce their debts later, once they have supported the economy into recovery.
Different countries, different paths
In the United States, the United Kingdom, and Spain, all of which experienced significant credit bubbles before the financial crisis of 2008, households have been reducing their debt at different speeds. The most significant reduction occurred among US households. Let’s review each country in turn.
The United States: Light at the end of the tunnel
Household debt outstanding has fallen by $584 billion (4 percent) from the end of 2008 through the second quarter of 2011 in the United States. Defaults account for about 70 and 80 percent of the decrease in mortgage debt and consumer credit, respectively. A majority of the defaults reflect financial distress: overextended homeowners who lost jobs during the recession or faced medical emergencies found that they could not afford to keep up with debt payments. It is estimated that up to 35 percent of the defaults resulted from strategic decisions by households to walk away from their homes, since they owed far more than their properties were worth. This option is more available in the United States than in other countries, because in 11 of the 50 states—including hard-hit Arizona and California—mortgages are nonrecourse loans, so lenders cannot pursue the other assets or income of borrowers who default. Even in recourse states, US banks historically have rarely pursued borrowers.
Historical precedent suggests that US households could be up to halfway through the deleveraging process, with one to two years of further debt reduction ahead. We base this estimate partly on the long-term trend line for the ratio of household debt to disposable income. Americans have constantly increased their debt levels over the past 60 years, reflecting the development of mortgage markets, consumer credit, student loans, and other forms of credit. But after 2000, the ratio of household debt to income soared, exceeding the trend line by about 30 percentage points at the peak (Exhibit 1). As of the second quarter of 2011, this ratio had fallen by 11 percent from the peak; at the current rate of deleveraging, it would return to trend by mid-2013. Faster growth of disposable income would, of course, speed this process.
We came to a similar conclusion when we compared the experiences of US households with those of households in Sweden and Finland in the 1990s. During that decade, these Nordic countries endured similar banking crises, recessions, and deleveraging. In both, the ratio of household debt to income declined by roughly 30 percent from its peak. As Exhibit 2 indicates, the United States is closely tracking the Swedish experience, and the picture looks even better considering that clearing the backlog of mortgages already in the foreclosure pipeline could reduce US household debt ratios by an additional six percentage points.
As for the debt service ratio of US households, it’s now down to 11.5 percent—well below the peak of 14.0 percent, in the third quarter of 2007, and lower than it was even at the start of the bubble, in 2000. Given current low interest rates, this metric may overstate the sustainability of current US household debt levels, but it provides another indication that they are moving in the right direction.
Nonetheless, after US consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis. That’s because home equity loans and cash-out refinancing, which from 2003 to 2007 let US consumers extract $2.2 trillion of equity from their homes—an amount more than twice the size of the US fiscal-stimulus package—will not be available. The refinancing era is over: housing prices have declined, the equity in residential real estate has fallen severely, and lending standards are tighter. Excluding the impact of home equity extraction, real consumption growth in the pre-crisis years would have been around 2 percent per annum—similar to the annualized rate in the third quarter of 2011.
The United Kingdom: Debt has only just begun to fall
Three years after the start of the financial crisis, UK households have deleveraged only slightly, with the ratio of debt to disposable income falling from 156 percent in the fourth quarter of 2008 to 146 percent in second quarter of 2011. This ratio remains significantly higher than that of US households at the bubble’s peak. Moreover, the outstanding stock of household debt has fallen by less than 1 percent. Residential mortgages have continued to grow in the United Kingdom, albeit at a much slower pace than they did before 2008, and this has offset some of the £25 billion decline in consumer credit.
Still, many UK residential mortgages may be in trouble. The Bank of England estimates that up to 12 percent of them may be in some kind of forbearance process, and an additional 2 percent are delinquent— similar to the 14 percent of US mortgages that are in arrears, have been restructured, or are now in the foreclosure pipeline (Exhibit 3). This process of quiet forbearance in the United Kingdom, combined with record-low interest rates, may be masking significant dangers ahead. Some 23 percent of UK households report that they are already “somewhat” or “heavily” burdened in paying off unsecured debt.2 Indeed, the debt payments of UK households are one-third higher than those of their US counterparts—and 10 percent higher than they were in 2000, before the bubble. This statistic is particularly problematic because at least two-thirds of UK mortgages have variable interest rates, which expose borrowers to the potential for soaring debt payments should interest rates rise.
Given the minimal amount of deleveraging among UK households, they do not appear to be following Sweden or Finland on the path of significant, rapid deleveraging. Extrapolating the recent pace of UK household deleveraging, we find that the ratio of household debt to disposable income would not return to its long-term trend until 2020. Alternatively, it’s possible that developments in UK home prices, interest rates, and GDP growth will cause households to reduce debt slowly over the next several years, to levels that are more sustainable but still higher than historic trends. Overall, the United Kingdom needs to steer a difficult course that reduces household debt steadily, but at a pace that doesn’t stifle growth in consumption, which remains the critical driver of UK GDP.
Spain: The long unwinding road
Since the credit crisis first broke, Spain’s ratio of household debt to disposable income has fallen by 4 percent and the outstanding stock of household debt by just 1 percent. As in the United Kingdom, home mortgages and other forms of credit have continued to grow while consumer credit has fallen sharply.
Spain’s mortgage default rate climbed following the crisis but remains relatively low, at approximately 2.5 percent, thanks to low interest rates. The number of mortgages in forbearance has also risen since the crisis broke, however. And more trouble may lie ahead. Almost half of the households in the lowest-income quintile face debt payments representing more than 40 percent of their income, compared with slightly less than 20 percent for low-income US households. Meanwhile, the unemployment rate in Spain is now 21.5 percent, up from 9 percent in 2006. For now, households continue to make payments to avoid the country’s conservative recourse laws, which allow lenders to go after borrowers’ assets and income for a long period.
In Spain, unlike most other developed economies, the corporate sector’s debt levels have risen sharply over the past decade. A significant drop in interest rates after the country joined the eurozone, in 1999, unleashed a run-up in real-estate spending and an enormous expansion in corporate debt. Today, Spanish corporations hold twice as much debt relative to national output as do US companies, and six times as much as German companies. Debt reduction in the corporate sector may weigh on growth in the years to come.
Signposts for recovery
Paring debt and laying a foundation for sustainable long-term growth should take place simultaneously, difficult as that may seem. For economies facing this dual challenge today, a review of history offers key lessons. Three historical episodes of deleveraging are particularly relevant: those of Finland and Sweden in the 1990s and of South Korea after the 1997 financial crisis. All these countries followed a similar path: bank deregulation (or lax regulation) led to a credit boom, which in turn fueled real-estate and other asset bubbles. When they collapsed, these economies fell into deep recession, and debt levels fell.
In all three countries, growth was essential for completing a five- to seven-year-long deleveraging process. Although the private sector may start to reduce debt even as GDP contracts, significant public-sector deleveraging, absent a sovereign default, typically occurs only when GDP growth rebounds, in the later years of deleveraging (Exhibit 4). That’s true because the primary factor causing public deficits to rise after a banking crisis is declining tax revenue, followed by an increase in automatic stabilizer payments, such as unemployment benefits.3 A rebound of economic growth in most deleveraging episodes allows countries to grow out of their debts, as the rate of GDP growth exceeds the rate of credit growth.
No two deleveraging economies are the same, of course. As relatively small economies deleveraging in times of strong global economic expansion, Finland, South Korea, and Sweden could rely on exports to make a substantial contribution to growth. Today’s deleveraging economies are larger and face more difficult circumstances. Still, historical experience suggests five questions that business and government leaders should consider as they evaluate where today’s deleveraging economies are heading and what policy priorities to emphasize.
1. Is the banking system stable?
In Finland and Sweden, banks were recapitalized and some were nationalized. In South Korea, some banks were merged and some were shuttered, and foreign investors for the first time got the right to become majority investors in financial institutions. The decisive resolution of bad loans was critical to kick-start lending in the economic- rebound phase of deleveraging.
The financial sectors in today’s deleveraging economies began to deleverage significantly in 2009, and US banks have accomplished the most in that effort. Even so, banks will generally need to raise significant amounts of additional capital in the years ahead to comply with Basel III and national regulations. In most European countries, business demand for credit has fallen amid slow growth. The supply of credit, to date, has not been severely constrained. A continuation of the eurozone crisis, however, poses a risk of a significant credit contraction in 2012 if banks are forced to reduce lending in the face of funding constraints. Such a forced deleveraging would significantly damage the region’s ability to escape recession.
2. Are structural reforms in place?
In the 1990s, each of the crisis countries embarked on a program of structural reform. For Finland and Sweden, accession to the European Union led to greater economies of scale and higher direct investment. Deregulation in specific industry sectors—for example, retailing—also played an important role.4 South Korea followed a remarkably similar course as it restructured its large corporate conglomerates, or chaebol, and opened its economy wider to foreign investment. These reforms unleashed growth by increasing competition within the economy and pushing companies to raise their productivity.
Today’s troubled economies need reforms tailored to the circumstances of each country. The United States, for instance, ought to streamline and accelerate regulatory approvals for business investment, particularly by foreign companies. The United Kingdom should revise its planning and zoning rules to enable the expansion of successful high-growth cities and to accelerate home building. Spain should drastically simplify business regulations to ease the formation of new companies, help improve productivity by promoting the creation of larger ones, and reform labor laws.5 Such structural changes are particularly important for Spain because the fiscal constraints now buffeting the European Union mean that the country cannot continue to boost its public debt to stimulate the economy. Moreover, as part of the eurozone, Spain does not have the option of currency depreciation to stimulate export growth.
3. Have exports surged?
In Sweden and Finland, exports grew by 10 and 9.4 percent a year, respectively, between 1994 and 1998, when growth rebounded in the later years of deleveraging. This boom was aided by strong export-oriented companies and the significant currency devaluations that occurred during the crisis (34 percent in Sweden from 1991 to 1993). South Korea’s 50 percent devaluation of the won, in 1997, helped the nation boost its share of exports in electronics and automobiles.
Even if exports alone cannot spur a broad recovery, they will be important contributors to economic growth in today’s deleveraging economies. In this fragile environment, policy makers must resist protectionism. Bilateral trade agreements, such as those recently passed by the United States, can help. Salvaging what we can from the Doha round of trade talks will be important. Service exports, including the “hidden” ones that foreign students and tourists generate, can be a key component of export growth in the United Kingdom and the United States.
4. Is private investment rising?
Another important factor that boosted growth in Finland, South Korea, and Sweden was the rapid expansion of investment. In Sweden, it rose by 9.7 percent annually during the economic rebound that began in 1994. Accession to the European Union was part of the impetus. Something similar happened in South Korea after 1998 as barriers to foreign direct investment fell. These soaring inflows helped offset slower private-consumption growth as households deleveraged.
Given the current very low interest rates in the United Kingdom and the United States, there is no better time to embark upon investments. Those for infrastructure represent an important enabler, and today there are ample opportunities to renew the aging energy and transportation networks in those countries. With public funding limited, the private sector can play an important role in providing equity capital, if pricing and regulatory structures enable companies to earn a fair return.
5. Has the housing market stabilized?
During the three historical episodes discussed here, the housing market stabilized and began to expand again as the economy rebounded. In the Nordic countries, equity markets also rebounded strongly at the start of the recovery. This development provided additional support for a sustainable rate of consumption growth by further increasing the “wealth effect” on household balance sheets.
In the United States, new housing starts remain at roughly one-third of their long-term average levels, and home prices have continued to decline in many parts of the country through 2011. Without price stabilization and an uptick in housing starts, a stronger recovery of GDP will be difficult,6 since residential real-estate construction alone contributed 4 to 5 percent of GDP in the United States before the housing bubble. Housing also spurs consumer demand for durable goods such as appliances and furnishings and therefore boosts the sale and manufacture of these products.
At a time when the economic recovery is sputtering, the eurozone crisis threatens to accelerate, and trust in business and the financial sector is at a low point, it may be tempting for senior executives to hunker down and wait out macroeconomic conditions that seem beyond anyone’s control. That approach would be a mistake. Business leaders who understand the signposts, and support government leaders trying to establish the preconditions for growth, can make a difference to their own and the global economy.Source: https://www.mckinseyquarterly.com/Working_out_of_debt_2914
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