Banks to grab share of ECB’s €500bn loans

The European Central Bank is set to flood banking markets with €500bn (£424bn) of cheap loans this week, taking its financial support of the European Union to €1trn in just three months.

On Wednesday, the ECB will hold its second allotment of three-year loans to private banks and other institutions, known as the longer-term refinancing operations (LTRO). Analysts are expecting banks to apply for between €200bn and €750bn in total, with most forecasts around the €500bn mark.
In December, 523 banks borrowed €489bn from the first LTRO. The loans carried an interest rate of around 1 per cent a year. The new loans will be just as cheap, but the collateral requirements have been loosened. Banks will be able to pledge corporate and consumer loans, rather than just government bonds, in return for the borrowing.
The new LTRO will be conducted through national central banks, not the ECB, so governments will take the losses should their banks be unable to repay the loans.
The first unprecedented provision of liquidity has been credited by the ECB president, Mario Draghi, with helping Europe to avoid a banking crisis this year. Some banks had found it increasingly difficult to borrow in the second half of last year. These institutions used the ECB’s cheap funds to meet their liabilities.
The liquidity injection also seems to have helped bring down the borrowing costs of some distressed eurozone states, as banks, particularly in Spain and Italy, have used the money to invest in bonds issued by their governments. Italian 10-year yields have come down from above 7 per cent to 5.5 per cent. Spanish 10-year yields have fallen from 5.7 to 5 per cent.
Sony Kapoor of the Re-Define think tank said: “The bigger the LTRO next week, the more the short-term relief for the banking sector, but at the cost of making a sustainable exit from life-support even harder.”
Jens Larsen of RBC Capital Markets, argued that the LTRO would be beneficial as long as banks restructure. “If the euro banks spend the time wisely by reducing their balance sheets and raising the necessary capital that’s not so bad,” he said. “But if they’re not doing that, it’s dangerous.”

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Fitch downgrades Hungary to junk status

BUDAPEST, Hungary (AP) — Fitch downgraded Hungary’s credit rating to junk status on Friday, citing a standoff between the government and international lenders like the IMF and the European Union over possible rescue loans.
Fitch kept a negative outlook on Hungary, indicating a more than a 50 percent chance for another downgrade on the Central European nation of 10 million people within the next two years. The move followed similar action from Moody’s and Standards & Poor’s.
Hungary’s shaky finances have been battered this entire week. Its currency, the forint, fell to all-time lows during two consecutive days and the government suffered through a rough bond auction Thursday in which the interest rates it had to paid to borrow jumped more than 2 percentage points in just a few weeks.
Investors are deeply unsure about the government’s economic policies and whether it can agree upon a rescue loan with the International Monetary Fund.
Fitch Ratings’ decision to cut Hungary’s credit rating one notch, to BB+ from BBB-, was triggered partly “by further unorthodox economic policies which are undermining investor confidence and complicating the agreement of a new IMF-EU deal,” said Matteo Napolitano, Director in Fitch’s Sovereign Group.
Hungary late last year requested financial aid from the EU and the IMF. But the two institutions broke off preliminary negotiations in December amid concerns over new laws that hurt the independence of Hungary’s central bank.
“Even if a (loan) agreement were to be reached, doubts would remain over whether the Hungarian government could submit to its strict conditionality, given its track record of policy unpredictability,” Fitch said.
Government spokesman Andras Giro-Szasz said the downgrade was “surprising” considering statements from Prime Minister Viktor Orban and Tamas Fellegi, Hungary’s chief financial negotiator, confirming the country’s intention to soon reach an agreement with international creditors and affirming its support for the independence of the central bank.
Earlier Friday, Orban met with National Bank of Hungary President Andras Simor and the government’s top economic officials. Orban dismissed market speculation that his conservative government was planning to raid central bank reserves to prop up the state budget and said it would do everything it can to support the central bank’s efforts to stabilize the economy.
On Friday, the forint strengthened to around 215 per euro after falling as low as 224 per euro on Thursday.
Despite government pledges, investors are wary of government policies that boost budget revenues without unpopular austerity measures — such as windfall taxes on banks, telecommunications firms and others. They are also unnerved by Hungary‘s new constitution and new laws that have centralized political power and eroded democratic checks and balances.
Hungary has also been deeply affected by the eurozone’s debt crisis — nearly 80 percent of its exports go to EU countries. Its domestic consumption has been weakened by high levels of household debt, including many mortgages held in soaring Swiss francs.
Many experts see the country falling back into a recession this year, though not as deeply as the 6.7 percent contraction in 2009.
Hungary was given a bailout of euro20 billion ($26 billion) in 2008 after the collapse of U.S. investment bank Lehman Brothers. Yet Orban, whose Fidesz party gained a two-thirds majority in parliament in April 2010 elections, chose to end the deal so IMF would not oversee Hungary’s economic policy

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Analysis: China investment wave unlikely to swamp EU

VENICE (Reuters) – The sign in a boutique selling glass hand-crafted on the Venetian island of Murano betrays an uncertain grasp of English. But the owner is very sure who is to blame for the tough times confronting the 700-year-old local glassmaking industry.
“Everything in this shop is not made in China,” it proclaims. A few doors away, imported Murano lookalikes sell for much less. To the untrained eye, they appear identical.
With Europe drowning in debt and flirting with recession, China’s influence can only rise further. Euro zone governments would love Beijing to plough more of its $3.2 trillion in foreign-exchange reserves into their bonds.
China is also likely to chip in with a loan to the International Monetary Fund to provide a financing backstop in case Italy and Spain are shut out of the bond markets.
Last week’s $3.5 billion acquisition by China Three Gorges Corp of the Portuguese government’s stake in utility EDP is also a sign of things to come.
Financiers turn instinctively to fast-growing China as they try to flush out buyers for assets that are going on the block as European governments, banks and companies pay down debt.
But, despite Chinese leaders’ expressing interest in diversifying the country’s overseas asset base away from government paper, analysts do not expect a sea change in China’s traditionally cautious approach to expanding in Western markets. Africa and Asia are likely to remain China’s top targets for now.
“There are going to be opportunities, but we’re not going to see China buying up Europe,” said Thilo Hanemann, research director at the Rhodium Group, an investment advisory and strategic planning firm in New York.
TREADING SOFTLY
There are many reasons for the wariness.
Lengthy delays in obtaining the approval of regulators in Beijing put Chinese companies at a disadvantage in mergers and acquisitions when the seller wants a quick deal. Companies lack the management skills to integrate overseas acquisitions. And, perhaps most importantly, prospects are much brighter at home than they are in Europe.
“If you compare the rates of growth in China and in Europe, are you sensible buying into a brand that’s seen its best years of growth? said Edward Radcliffe, a partner in Shanghai with Vermillion, an M&A advisory boutique that focuses on cross-border China deals.
Still, he said some larger Chinese groups, both state-owned and private, had started to explore opportunities in Europe and the United States.
The 27-member European Union is China’s biggest export market. But foreign direct investment (FDI) has badly lagged, totaling $8 billion by the EU’s reckoning or $12 billion on China’s count – less than 0.2 percent of total FDI in the EU, according to Rhodium.
The firm has kept its own tally since 2003, but its total of $15 billion through mid-2011, though greater than the official data, is still small.
Hanemann said he was sure 2012 would see deals in Europe in technology and consumer products to enable Chinese firms to climb the value ladder and build their domestic market share.
“Ultimately, Chinese companies have to become true multinationals, like Japanese and Korean firms before them,” he said. “Over the longer term, there’s no reason to believe that China is going to take a different path.”
But he was skeptical whether most Chinese companies would be able to seize the opportunities that were likely to crop up in the coming year. To do so, they would have to manage public perceptions in Europe and obtain quick regulatory approval at home.
“There are a lot of deals that the Chinese cannot take on. If the Chinese government sees a company making a bid for troubled assets that risks provoking a political backlash in Europe, I think they’d step in to make sure there’s no embarrassment for the Chinese side.”
POLITICAL OVERLAY
The failure of Chinese firms to buy Saab, the Swedish car maker that was declared bankrupt last week, was a telling example of the difficulties facing Chinese investors, Hanemann said.
But the picture is not black and white. After all, Volvo, another Swedish car maker, was successfully acquired by a Chinese rival from Ford Motor Co in 2010.
Christine Lambert-Goue, managing director in Beijing at Invest Securities China, said companies were not looking mainly for outright acquisitions but for brands, patents and technology that would bolster their position at home.
“Companies are only ready to pay for assets from Europe that will enable them to gain market share in China,” she said.
Investment in Europe will take off eventually, but a deteriorating political climate represents an obstacle in the short term, said Jonathan Holslag of the Brussels Institute of Contemporary China Studies.
The EU, like the United States, is talking tough about Chinese “state capitalism” and is crafting a more assertive trade policy to counter what it sees as a playing field tilted against foreign companies.
For its part, Beijing smells protectionism in the air in response to its growing economic clout.
“The European Union is disappointed with the reluctance of Beijing to open its economy further, whereas Beijing complains about Europe being too reluctant to share its knowledge or to allow Chinese investors to expand their presence in important sectors like infrastructure,” Holslag said.
And if Europe fails to snap out of its economic malaise, the risk is that a super-competitive China will be made a scapegoat.
“The more governments are confronted with high unemployment figures, the more we will start to see China as a challenger rather than as a savior,” Holslag said.

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China Unlikely to Ride to Europe’s Rescue Soon

By ALAN WHEATLEY | REUTERS

Published: December 26, 2011

VENICE — The sign in a boutique selling glass hand-crafted on the Venetian island of Murano betrays an uncertain grasp of English. But the owner is very sure who is to blame for the tough times confronting the 700-year-old local glassmaking industry.
“Everything in this shop is not made in China,” the sign proclaims. A few doors away, imported Murano look-alikes sell for much less. To the untrained eye, they appear identical.
With Europe drowning in debt and flirting with recession, China’s influence can only rise more. Euro zone governments would love Beijing to plow more of its $3.2 trillion in foreign-exchange reserves into their bonds.
China is also likely to chip in with a loan to the International Monetary Fund to provide a financing backstop in case Italy and Spain are shut out of the bond markets.
The $3.5 billion acquisition last week by China Three Gorges of the Portuguese government’s stake in the utility Energias de Portugal is also a sign of things to come. Financiers turn instinctively to fast-growing China as they try to flush out buyers for assets going on the block as European governments, banks and companies pay down debt.
But despite expressions of interest by Chinese leaders in diversifying the country’s overseas asset base away from government paper, analysts do not expect a sea change in China’s traditionally cautious approach to expanding in Western markets. Africa and Asia are likely to remain China’s top targets for now.
“There are going to be opportunities, but we’re not going to see China buying up Europe,” said Thilo Hanemann, research director at the Rhodium Group, an investment advisory and strategic planning firm in New York.
There are many reasons for the wariness. Lengthy delays in obtaining the approval of regulators in Beijing put Chinese companies at a disadvantage in mergers and acquisitions when the seller wants a quick deal. Chinese companies may lack the management skills to integrate overseas acquisitions. And perhaps most important, their prospects are much brighter at home than they are in Europe.
“If you compare the rates of growth in China and in Europe, are you sensible buying into a brand that’s seen its best years of growth?” said Edward Radcliffe, a partner in Shanghai with Vermillion, a merger and acquisition advisory boutique that focuses on cross-border China deals.
Still, he said that some larger Chinese groups, both state-owned and private, had started to explore opportunities in Europe and the United States.
The 27-member European Union is China’s biggest export market.
But foreign direct investment in the European Union by China has badly lagged, totaling $8 billion by the Union’s reckoning or $12 billion on China’s count — less than 0.2 percent of total foreign direct investment in the Union, according to Rhodium. The firm has kept its own tally since 2003, but its total of $15 billion through mid-2011, though greater than the official data, is still small.
Mr. Hanemann said he was sure 2012 would see deals in Europe in technology and consumer products to enable Chinese companies to climb the value ladder and build their domestic market share. “Ultimately, Chinese companies have to become true multinationals, like Japanese and Korean firms before them,” he said. “Over the longer term, there’s no reason to believe that China is going to take a different path.”
But he was skeptical about whether most Chinese companies would be able to seize the opportunities that were likely to crop up in the coming year. To do so, they would have to manage public perceptions in Europe and obtain quick regulatory approval at home.
“There are a lot of deals that the Chinese cannot take on,” Mr. Hanemann said. “If the Chinese government sees a company making a bid for troubled assets that risks provoking a political backlash in Europe, I think they’d step in to make sure there’s no embarrassment for the Chinese side.”
The failure of Chinese companies to buy Saab, the Swedish carmaker that was declared bankrupt last week, was a telling example of the difficulties facing Chinese investors, Mr. Hanemann said.
But the picture is not black and white. After all, Volvo, another Swedish carmaker, was acquired by a Chinese company from Ford Motor in 2010.
Christine Lambert-Goué, managing director in Beijing at Invest Securities China, said that Chinese companies were not looking mainly for outright acquisitions but for brands, patents and technology that would bolster their positions at home.
“Companies are only ready to pay for assets from Europe that will enable them to gain market share in China,” she said.
Investment in Europe will take off eventually, but a deteriorating political climate represents an obstacle in the short term, said Jonathan Holslag of the Brussels Institute of Contemporary China Studies.
The European Union, like the United States, is talking tough about Chinese “state capitalism” and is devising a more assertive trade policy to counter what it sees as a playing field tilted against foreign companies.
For its part, Beijing smells protectionism in response to its growing economic clout.
“The European Union is disappointed with the reluctance of Beijing to open its economy further, whereas Beijing complains about Europe being too reluctant to share its knowledge or to allow Chinese investors to expand their presence in important sectors like infrastructure,” Mr. Holslag said.
And if Europe fails to snap out of its economic malaise, the risk is that a super-competitive China will be made a scapegoat.
“The more governments are confronted with high unemployment figures, the more we will start to see China as a challenger rather than as a savior,” Mr. Holslag said.
Alan Wheatley is a Reuters correspondent.
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Indonesia Regains Investment Grade as Fitch Raises Its Rating

December 15, 2011, 4:18 PM EST
By Novrida Manurung
Dec. 16 (Bloomberg) — Indonesia regained investment grade rating for its sovereign debt at Fitch Ratings after 14 years, as Southeast Asia’s largest economy withstands faltering global growth and contains borrowings.
The country’s long-term foreign and local currency debt was raised to BBB- from BB+, Fitch said in a statement yesterday. The outlook on both ratings is stable. Indonesia lost the investment grade rating in December 1997, during the Asian financial crisis. The rating puts the nation on the same level as India.
“The upgrades reflect the country’s strong and resilient economic growth, low and declining public-debt ratios, strengthened external liquidity and a prudent overall macro policy framework,” Philip McNicholas, director in Fitch’s Asia- Pacific Sovereign Ratings group, said in the statement.
Indonesia’s standing with rating companies has improved as President Susilo Bambang Yudhoyono targets growth of as much as 6.6 percent on average through the remainder of his term ending in 2014, pledging to spur investment and reduce the budget deficit. The country’s economy, which avoided the contraction that neighbors Singapore, Malaysia and Thailand suffered during the 2009 global slump, has expanded more than 6 percent this year even as Europe’s debt crisis threatens Asian exports.
“This doesn’t give us immunity,” Helmi Arman, an economist at Citigroup Inc. in Jakarta, said after Fitch released the announcement. “But they’re going to have a broader investor base in the market because of this move. It will certainly improve our resilience.”
Rupiah Performance
The rupiah has outperformed every Asian currency except the Japanese yen, Chinese yuan and the Hong Kong dollar this year, and Indonesia’s benchmark stock index is the fourth-best performer in the region. The currency slid 0.04 percent to 9,090 a dollar yesterday, according to prices from local banks compiled by Bloomberg.
Government bonds gained earlier yesterday. The yield on the 8.25 percent note due July 2021 declined four basis points, or 0.04 percentage point, to 6.25 percent, according to midday prices from the Inter-Dealer Market Association. It reached 6.06 percent on Dec. 6, the lowest since the securities were sold in July last year.
Demand for Indonesian bonds will increase following Fitch’s move, Rahmat Waluyanto, director general at the finance ministry’s debt management office, said in Jakarta yesterday. Capital inflow, especially foreign direct investment, will likely increase, he said in a mobile-phone text message.
‘Waited a Long Time’
“We’ve waited for this upgrade for a long time, in line with our effort to implement consistent and careful economic policies,” Hartadi Sarwono, deputy governor at the central bank, said in a mobile-phone text message in Jakarta yesterday. “Indonesia’s economic prospects will be better with lower risk and borrowing costs supporting financing of economic activities.”
Moody’s Investors Service raised the nation’s rating in January to Ba1. In April, Standard & Poor’s increased Indonesia’s long-term foreign-currency rating one level to BB+ from BB, with a positive outlook. The ratings are one level below investment grade.
Indonesia’s performance contrasts with that of European nations, whose borrowing costs have soared as the debt crisis deepened.
European Union
European Union leaders agreed at a Dec. 8-9 summit in Brussels to tighter control of tax and spending by governments that overstep the bloc’s deficit limit of 3 percent of gross domestic product. They also pledged a faster start to a 500 billion-euro ($652 billion) rescue fund. Standard & Poor’s and Moody’s Investors Service are reviewing the agreement and its implications for credit ratings on euro countries.
Fitch projects Indonesia’s GDP growth will average more than 6 percent per annum over the period to 2013, it said in yesterday’s statement.
“Indonesia’s domestically-oriented economy and success in delivering relatively strong economic growth without the creation of external imbalances, or a reliance on short-term external financing suggests economic growth prospects should prove resilient to external shocks, as was the case in 2008,” Fitch said. “Low public debt and positive real interest rates give the authorities policy flexibility to respond to any slowdown.”
–With assistance from Berni Moestafa and Hidayat Setiaji in Jakarta. Editors: Stephanie Phang, Greg Ahlstrand.
To contact the reporter on this story: To contact the reporter on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Portugal slips deeper into recession in Q3

LISBON (Reuters) – Portugal‘s economy shrank a greater than initially reported 0.6 percent in the third quarter, slipping deeper into recession as austerity and financing problems weighed amid the debt crisis while export growth slowed.
Austerity measures under Portugal’s 78 billion euro bailout agreed with the European Union and the IMF in May are expected to lead to the deepest recession since the country returned to democracy in 1974. The government projects the economy will contract 1.6 percent this year and 3 percent in 2012.
The National Statistics Institute‘s second reading of GDP on Friday showed a sharper quarter-on-quarter contraction than the flash estimate of minus 0.4 percent.
GDP contracted by 0.2 percent in the second quarter and 0.6 percent in the first quarter of this year, INE said.
“The reduction of economic activity is still more of a reflection of difficulties with the financing of the economy rather than the impact of austerity … which means the recession will continue to worsen in the quarters to come when austerity measures fully kick in,” said Filipe Garcia, head of Informacao de Mercados Financeiros economic consultants.
INE said that year-on-year GDP fell 1.7 percent, the same as in its flash estimate, after a contraction of 1 percent in the previous quarter.
Parliament approved last week a tough 2012 budget that suspends holiday and year-end bonuses for civil servants and hikes many taxes further.
The INE said internal demand, which has already suffered from higher taxes and pay cuts imposed this year, dropped 0.6 percent from the previous quarter as both investment and public consumption ebbed.
Compared with a year ago, internal demand fell a steep 4.6 percent, with private consumption down 3.3 percent and investment slumping by 13.7 percent.
Exports rose just 2.7 percent from the previous quarter, their positive impact neutralised by a 2.4 percent increase in imports. Export growth also decelerated to 6.5 percent year-on-year from 8.7 percent in the second quarter.
Nevertheless, another batch of INE data on Friday showed exports growing faster in the three months through October than in the third quarter, with Portugal’s trade gap falling a steep 30 percent from a year earlier.
The government is hoping a recovery may begin by late 2012 mainly on exports, although many economists warn Europe’s economic slowdown would make it much more difficult for Portugal to return to growth and meet its 2012 budget deficit target under the bailout. It has to slash the gap to 4.5 percent next year from this year’s projected 5.9 percent.
(Reporting By Andrei Khalip and Sergio Goncalves)

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