Tag Archives: Asia

Greece Seeks $59.2 Billion Bailout as Tsipras Bows to Demands

Bloomberg, Jul 10, 2015

In an 11th-hour bid to stay in the euro, the government of Greek Prime Minister Alexis Tsipras offered to meet most of the demands made by creditors in exchange for a bailout of 53.5 billion euros ($59.4 billion).

The proposal submitted to European institutions late Thursday almost mirrored the one from creditors on June 26, which was rejected by voters in a July 5 referendum. The package of spending cuts, pension savings and tax increases will face its first hurdle in the Greek Parliament on Friday.

Though Tsipras ceded ground, he insists long-term debt needs to be made more manageable to allow Greece to recover from a crisis that has erased a quarter of its economy. He has a growing support base that includes the U.S., European Union President Donald Tusk and the International Monetary Fund.

“We are definitely closer to a deal than ever, as Tsipras has in the end given in,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute in Washington, citing concessions such as speeding up the pension reform to start next year.

Markets seemed to share that interpretation. U.S. and Japanese index futures climbed with the euro after Greece’s proposal. Standard & Poor’s 500 Index futures and the MSCI Asia Pacific Index both gained 1 percent by 1:19 p.m. in Tokyo, while the euro strengthened 0.6 percent to $1.1098.

Agreement Risks

Risks would remain if an agreement is reached, ABN Amro Bank NV economist Nick Kounis wrote in a note.

“The deal would still need to be passed through various national parliaments,” Kounis wrote. “Even if it is passed, there is a risk that Greece finds it difficult to stick to the program in coming months. The economy looks set for a sharp contraction, which is not the ideal background to be implementing tough measures.”

It remains to be seen if the reforms are enough to appease the trio of creditors. A summit of EU leaders on Sunday will likely have the final say on whether the debt-addled country will get a new three-year loan.

For Greece, time is of the essence. Two weeks of bank closures and capital controls have piled on to the economic misery of its 11 million citizens, who voted so overwhelmingly against more austerity.

The Greek government said it would use the loan from the European Stability Mechanism to cover debt repayments between 2015 and 2018, mostly to the IMF and the European Central Bank. It will then be left with debt owed only to EU institutions.

Merkel’s Hardline

Greece’s proposal includes creditors’ longstanding demands for sales tax increases and cuts in public spending on pensions. Greece also proposes the restructuring of its debt and a package of growth measures of 35 billion euros.

German Chancellor Angela Merkel, who leads the country that has been the biggest contributor to Greece’s bailouts, is coming under mounting pressure to soften her position on debt relief for Greece. Germany’s resistance to it has been a major obstacle to a deal.

“A realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors,” Tusk told reporters in Luxembourg on Thursday. “Only then will we have a win-win situation.”

Whether Greece can expect a writedown of its outstanding debts, which exceed 170 percent of gross domestic product, is another matter. Nevertheless, it will likely be addressed.

Home Front

“We think debt relief of some form will be on the table,” but structured in a fashion capable of winning German backing, Royal Bank of Scotland analyst Michael Michaelides said in a research report.

Even if Tsipras and creditors can reach a basic agreement, his greatest challenge may still lie at home.

On Friday morning, he’ll meet lawmakers of the ruling Coalition of the Radical Left, or Syriza, to discuss the offer. The party was elected in January after it promised to fight the successive spending cuts and tax hikes that had been required for previous bailouts.

“It seems quite likely that Tsipras will have to rely on opposition votes for this to pass, which means that from his personal perspective the referendum actually did a lot of good, as he is now the only credible leader of a national unity government,” Kirkegaard said in an e-mail.

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Blackstone Said to Get $3.5 Billion With Energy Debt Hot

Bloomberg, May 29, 2015

Blackstone CEO Steve SchwarzmanSteve Schwarzman, Blackstone’s co-founder, is worth $13.4 billion, according to the Bloomberg Billionaires Index.

In a good problem to have, Blackstone Group LP had to say no to clients.

Investors sought to put more than $4.5 billion into the firm’s first energy credit fund, two people with knowledge of the details said. Blackstone in the coming weeks will instead finalize the pool at $3.5 billion, the maximum to which it previously agreed, said the people, who requested anonymity because the close hasn’t been announced.

Christine Anderson, a spokeswoman for the New York-based alternative-asset manager, declined to comment on fundraising.

While leveraged buyouts of energy companies have been sparse after the price of oil plunged by more than 50 percent, firms such as Blackstone, Oaktree Capital Group LLC and Apollo Global Management LLC are seizing on an opportunity to lend to stressed energy producers as banks balk. Blackstone co-founder Steve Schwarzman and Apollo co-founder Josh Harris, both speaking this week at a conference in New York, cited energy as among the busiest areas for their firms.

High-yield bonds of energy companies have declined 9.2 percent from July, when they peaked last year. In December they were down 20 percent from the high point.

“Even though we’ve had crude up $10 a barrel there’s still some people who remember it at $115, and there are companies who really need credit,” Schwarzman said Thursday at Sanford C. Bernstein & Co.’s strategic decisions conference. “Banks don’t necessarily like to deal with certain complex situations, so we see a lot of opportunity” for GSO Capital Partners, Blackstone’s credit arm.

‘Large’ Opportunity

Firms and their clients often agree to a maximum amount for funds, known as a hard cap, to prevent the pools from becoming too large to invest and manage according to the investors’ risk and return objectives.

Apollo gathered $425 million in the first quarter for its first energy-focused credit vehicle. The New York-based firm hasn’t disclosed the amount it’s targeting for the fund.

“There is a very large opportunity in energy credit,” Harris said Wednesday at the conference. “We can get very high returns for lending to these companies. Some of these companies are going to need a lot of money.”

Blackstone’s GSO division, which manages $75 billion in assets, generated 9.9 percent of the firm’s revenue in 2014. Blackstone last week said Doug Ostrover, one of GSO’s three founders, will leave to start a family office.

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Imagine If Everything Started to Go Right With the World Economy

Bloomberg, May 19, 2015

China has outpaced the worst outlook in 22 of the last 24 years.

What if everything started to go right in the world economy?

It’s a lot to ask. The 1.1 percent global growth of the first quarter was the weakest for an expansion since 1998, according to JPMorgan Chase & Co. Former U.S. Treasury Secretary Lawrence Summers’s “secular stagnation” warning is gaining traction and central banks are finding more and more reasons to keep monetary policy easy.

That’s nevertheless not stopping Simon Cox, Asia Pacific investment strategist at BNY Mellon Investment Management, from thinking that “preoccupation with pessimism would seem to leave a gap in the intellectual marketplace to ponder what might go right.”

So curious was he that he teamed up with the Economist Intelligence Unit to compute just what would happen if everything in the big economies of the U.S., Japan, China and India all took off at the same time. Together they account for almost half of global gross domestic product.

“If these four economies were to fire on all cylinders at the same time, it would lift growth and trade in the rest of the world, reverse the slide in commodity prices and underpin a further rally in global share prices,” Cox said in a report sent to clients this month.

Too Downbeat

Cox’s simulation assumes Japan manages to average growth of 2 percent for the rest of this decade, the U.S. 3 percent, China 7 percent and India 8 percent.

Such an outlook is not as foolhardy as first appears. In the U.S., for example, the International Monetary Fund is predicting compound average growth between now and 2020 of about 2.5 percent, shooting distance from the 3 percent in Cox’s report.

Moreover, the IMF is often too downbeat. U.S. growth has exceeded its most pessimistic forecast in 16 of the past 24 years, while Japan and India topped it 15 times, according to Cox. China has outpaced the worst outlook in 22 of the last 24 years.

At times, the IMF wasn’t even optimistic enough. U.S. growth surpassed the lender’s highest forecast in one in four of the last 24 years and China did so in 13 years. Economists in the past missed the rebound from the Great Depression and the technology revolution of the 1990s.

Group of Four

There is also room for economies to speed up. The gap between actual U.S. growth and what economists think is its potential was $5.3 trillion over the past seven years — the equivalent to shutting the entire economy down for 3 1/2 months. The U.S. has operated below capacity in about 60 of the past 80 quarters.

There are also policies authorities could rectify to close such gaps, said Cox. India needs to make it easier to buy land and China for villages to sell it. The U.S. tax code is too complex and India’s is too weak. Companies in China and Japan distribute too few dividends to shareholders, while companies in America probably do too much.

So what would happen if what Cox calls the Group of Four did shift into its top gear? He and the EIU estimate there would be an extra $10 trillion in the group’s GDP in 2020. A further $8 trillion lift would be provided to the rest of the world.

$100 oil would be back and global food prices would surge 40 percent. The Nikkei 225 Stock Index would surpass 24,000 and the Standard & Poor’s 500 would pass 3,000 by the end of the decade.

“We cannot say with any certainty that the G-4 will grow as fast as we outlined,” said Cox. “We are saying that they could.”

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The $364 Billion Real Estate Threat Inside China’s Biggest Banks

Bloomberg, May 8, 2015

china_bubble

The possible bust after a big boom.

Fitch Ratings has called real estate the “biggest threat” to Chinese banks as surging loans tied to properties coincide with defaults and falling sales.

Corporate loans backed by buildings have grown almost fivefold since 2008 and residential mortgages have more than tripled in the period among lenders rated by Fitch, the company said Friday. That’s seen property loans held by China’s four biggest lenders soar to a total 2.26 trillion yuan ($364 billion), according to their annual reports.

“Collateral is supposed to reduce bank risk — but the rise of property collateral in corporate loans may actually increase the chance of bank failure,” Fitch analysts Jack Yuan and Grace Wu said in the report. “This is because the widespread use of such collateral has lowered the perceived risks of lending, fueling China’s credit build-up and spreading real-estate risk to other sectors of the economy.”

Alarm bells sounded last month when Kaisa Group Holdings Ltd. became the first Chinese developer to default on offshore bonds, putting more scrutiny on a sector that made up a third of the nation’s economy in 2013, according to Gavekal Dragonomics. Property prices in 70 Chinese cities have fallen for more than a year, the worst losing streak in at least a decade, while sales have dropped for 11 of the past 24 months, Bloomberg-compiled data show.

Even Higher

Loans backed by properties now comprise 40 percent of all facilities held by Fitch-rated banks, according to the report. Total credit to real estate could be as high as 60 percent if other types of financing besides direct loans are included, Fitch said.

“The property market is usually one of the main revenue contributors to the state,” said Raymond Chia, the head of credit research for Asia ex-Japan at Schroder Investment Management Ltd. “With the weakness in the sector, especially with excess inventory overhang as well as weak earnings by developers, economic growth will be affected.”

Industrial & Commercial Bank of China Ltd., the world’s biggest bank by assets, held 443.5 billion yuan of real estate loans, or 6.6 percent of all facilities, at the end of last year, according to its annual report. The portion for Bank of China Ltd., the nation’s second-largest, was 714.6 billion yuan of advances, or 8.4 percent of its credit book.

China Construction Bank Corp.’s property loans were reported at 520.1 billion yuan, or 5.5 percent of overall facilities. Agricultural Bank of China Ltd.’s real estate loans stood at 581.1 billion yuan, or 11.3 percent.

Be Cheerful

There’s still reasons for optimism on Chinese property, helped by the central bank cutting the lenders’ reserve requirement ratio twice this year, said Owen Gallimore, a Singapore-based credit strategist at Australia & New Zealand Banking Group Ltd.

“The recent data on property sales has shown improvement, especially for the biggest developers,” he said in an interview. “And with the PBOC aggressively easing, it’s hard to be bearish on Chinese property.”

Banks and developers will be hoping the bulls are correct. Chinese loans secured by real estate have increased 400 percent since 2008 at lenders rated by Fitch, compared with a 260 percent rise in facilities overall, according to Fitch.

“We believe a significant portion of China’s 4 trillion yuan stimulus package found its way into the real estate sector,” the analysts said in Friday’s report. “The rise of property collateral is a familiar theme in real estate booms.”

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China Still a Global Economic Engine Even at Lower Gear of 7%

Bloomberg, May 1, 2015

Shoppers Inside An Apple Inc. Store in BeijingApple Inc. certainly isn’t noting a slowdown with iPhone sales in China potentially exceeding the U.S. for the first time in the latest quarter.

A surging China saved the global economy from recession, but a slowing China may not consign it to a slump.

The world’s second-largest economy will grow 6.8 percent this year en route to 6 percent in 2017, the International Monetary Fund projects. That’s half the 14 percent of 2007 and well below the 10 percent of 2010.

The deceleration will certainly eat into global growth, given China now accounts for about 15 percent of worldwide gross domestic product. A slowing to 7 percent should be enough to reduce an already sub-par expansion everywhere by 0.5 percentage points, according to Capital Economics Ltd.

How it is slowing also matters, according to Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc. A shift from import-intensive industries such as real estate and corporate investment will hurt foreign trade partners.

“Import volumes have been very weak, thus affecting the rest of the world,” said Hong Kong-based Kuijs. Commodity producers such as Australia and neighbors in Asia seem to be suffering the most.

There are nevertheless some reasons for optimism to think that China will remain an engine for the world economy.

Firstly, it’s on course soon to pass $11 trillion in size compared with $2 trillion a decade ago. Andrew Kenningham at Capital Economics says that means it will still account for 30 percent of global growth in the next five years, higher than the 28 percent average since 2000. In dollar terms, it should contribute more than any other economy.

Weaker Demand

So it can grow more slowly, yet still provide plenty of lift. Another reason to not worry unduly is much of the slowdown has already occurred, and other economies kept ticking over regardless.

Weaker Chinese demand may also be welcome in some corners. With China a consumer of more than 10 percent of the world’s oil, commodity importers will be grateful for the slide in energy costs. Given importers typically spend more than energy producers, that should support expansion elsewhere.

Ding Shuang, head of Greater China economic research at Standard Chartered Plc, says the economy’s modernization will also help others. The U.S. will be one beneficiary as China requires more financial services, he says.

Apple Inc. certainly isn’t noting a slowdown, with iPhone sales in greater China exceeding those in the U.S. for the first time in the latest quarter. “The growth rate in China is significantly higher than most parts of the world,” Chief Financial Officer Luca Maestri told Bloomberg this week.

More Sustainable

Policy makers also are now on the case, cutting interest rates twice and reducing the amount of deposits banks must keep in reserve. There are also plans to boost the market for local-government bonds and recapitalize policy banks so they can lend more to government-favored projects.

Such stimulus is one reason JPMorgan Chase & Co. economists are predicting a pickup in global growth to more than 3 percent in the second half of the year, from 1.6 percent in the first quarter.

For China and the world, the ideal may ultimately be a China that is cushioned for now and more sustainable over time after the credit-fueled runaway rates of the past decade.

“China’s policy easing should support short-term growth and provide upside to current forecasts,” Deutsche Bank AG economists wrote in a report this week. “Rebalancing the economy should make growth more sustainable and resilient in the long run.”

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