China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

GM urges Seoul to act over currency

Posted on 31 March 2013 by

The chief executive of General Motors in South Korea has urged the new government to act against its rising currency, as carmakers express concern that a weakening Japanese yen is undermining the competitiveness of South Korean exports.

South Korea’s new president, Park Geun-hye, could help manufacturers by pursuing “a policy that favours on the foreign exchange, like both neighbours”, said Sergio Rocha, head of GM Korea, which is one of the US group’s biggest foreign units and exports more than 80 per cent of the vehicles it produces.

    “On our left and right side, they do things to support their own industry, to allow them to export – both China and Japan,” Mr Rocha said in an interview with the Financial Times.

    Even after a retreat over the past two months, the South Korean won has strengthened by 6 per cent against the US dollar since late May last year.

    This is dwarfed, however, by its 27 per cent rise against the yen over the same period, which has come as the new Japanese Prime Minister Shinzo Abe pushes for looser monetary policy.

    South Korea stands “on the front line of the Asian currency war”, says Société Générale, while industry analysts warn that carmakers will be the hardest hit among the country’s exporters.

    Carmakers are more directly exposed to Japanese competition than most other big South Korean groups, and they are now watching as Toyota and Honda enjoy the benefits of a dramatically weaker currency.

    Hyundai Motor and its affiliate Kia Motors, the two biggest South Korean carmakers, are expecting sales growth of just 4 per cent this year.

    Both companies say that currency concerns are complicating plans to gradually increase the selling prices of their cars, in line with a strategy of moving away from the low end of the market.

    “We worry a lot about the exchange rates,” said Lee Soon-nam, vice-president of overseas marketing at Kia Motors. Mr Lee said that while current rates were still “acceptable”, the weaker yen gave Japanese carmakers “more room to offer bigger buyer incentives and increase advertising”.

    The threat from Japanese carmakers is strongest in the US market, analysts say, citing their smaller market share in Europe and the impact of rising anti-Japanese sentiment in China.

    “The Korean won is moving in the wrong direction  . . . and if the exchange rate starts losing its competitiveness, it affects our business,” said Mr Rocha, while noting that GM’s decision to invest $7.3bn in South Korea over the next five years reflected its commitment to the country.

    An open attempt by Seoul to depress the value of its currency would breach a joint pledge made last month by G20 nations at a summit in Moscow, where they promised not to target exchange rates for competitive purposes.

    But some bankers suspect that South Korea has already been acting to hold down the won – something strongly denied by financial authorities, who say that they have intervened only to smooth volatility in the exchange rate.

    Craig Chan, a currency strategist at Nomura, estimates that – adjusting for currency fluctuations and including forward contracts – the value of Seoul’s interventions in the foreign exchange market amounted to $10bn in January, and $2.6bn in February.

    In spite of the carmakers’ fears, other big South Korean exporters are expecting relatively little impact from the won’s rise against the yen. Samsung Electronics has pulled ahead of its Japanese rivals in the smartphone and television markets, although the broader strength of the won will crimp the value of repatriated foreign profits.

    The large shipbuilders are increasingly focusing on vessels for the offshore oil industry, where Japanese rivals have little presence. Steelmaker Posco imports all its inputs and is benefiting from cheaper iron ore imports.

    Nonetheless, the won’s strength is unwelcome for most South Korean exporters, and is a major factor behind foreign investors’ net withdrawal of about Won2.1tn from the country’s stock market so far this year, said Chanik Park, an equities strategist at Barclays.

    But economists say that the won remains undervalued, pointing to a current account surplus of about 3 per cent of gross domestic product last year. The currency is still much weaker against the yen than before the 2008 financial crisis, which prompted risk-averse investors to sell South Korean assets while buying into the perceived safety of the Japanese currency.

    “There has been a bonus for Korean exporters over the past few years, as the won weakened and the yen was very strong,” said Kwon Young­-sun, an economist at Nomura. “So this means a reduced bonus.

    Bailey calls for bank capital transparency

    Posted on 31 March 2013 by

    Andrew Bailey©Anna Gordon

    Andrew Bailey, the incoming head the Prudential Regulation Authority

    Banks should be required to make their individualised capital requirements public so that investors can see which financial groups have attracted regulatory concerns about risk and why, says the UK’s new top financial watchdog.

    Andrew Bailey issued his call for transparency just before taking the helm of the new Prudential Regulation Authority, which will supervise the safety and soundness of 1,700 banks, insurers and large investment firms from Tuesday.

      His proposal would lift the lid on decades of tradition that have seen bank supervisors work behind the scenes to make individual lenders safer without ever telling the public of their concerns.

      Under the incoming Basel III global banking rules, all banks must meet public minimum requirements for capital and liquidity, but national supervisors can then pile additional “Pillar 2” requirements on individual banks to address particular risks.

      For decades, this process has taken place privately, with banks and regulators forbidden from discussing it. Investors have had no way of knowing why a particular bank has a core tier one capital ratio higher than the minimum: 7 per cent of risk-weighted assets under Basel III rules. The bank’s management may simply be conservative, but it might also be under orders to carry more capital because regulators think it has been doing a lot of extremely risky lending.

      Mr Bailey told the Financial Times that Pillar 2 information should be made public as part of broader moves to make it easier for analysts and investors to understand and compare bank balance sheets.

      “I would do it. . . It is the logical consequence of where we’re heading to,” said Mr Bailey. “If you only disclose on Pillar 1 . . . you’ve given half the story. The history of supervising is that it’s a very secretive activity, because . . . it’s commercially highly confidential, and yet, if you go entirely down that road, what you lose is accountability. I think we have to be more transparent.”

      Mr Bailey would need to convince other regulators to go along with his plans – particularly outside the UK. But global regulators are already moving to greater disclosure in other areas, including liquidity, “leverage”, which measures total borrowing, and the composition of capital. Mr Bailey said that, in a year, “I hope we’ll be further forward, and disappointed if we’re not.”

      The Basel Committee on Banking Supervision, which sets worldwide standards, is also pushing for more disclosure and more limits on how banks use models to measure risk, in another effort to make institutions easier to compare.

      This is a move that Mr Bailey thoroughly supports, in part because of his long experience as an economist. “If you go back 20 or 30 years, people were developing models which they thought were in some sense ‘right’, in inverted commas. Now we know that we’re not right. We’re never right.”

      Motor insurers struggle for profits

      Posted on 31 March 2013 by

      Motor insurers are facing a drop in profitability, despite hopes that a crackdown on Britain’s “compensation culture” taking effect on Monday will stem the growth of personal injury claims.

      In 2013, UK insurers are forecast to pay as much as £1.08 in claims and expenses for every pound they earn from premiums – the 19th consecutive year that the industry will have failed to turn an underwriting profit.

        This provisional estimate from Ernst & Young suggests that the long-awaited legal overhaul of injury claims will fail to improve the performance of the motor insurance sector, which has been under scrutiny since the recent stock market launches of Esure and Direct Line.

        Insurers had hoped that the changes to the personal injury legal regime – the biggest in a decade – would reduce the number of spurious whiplash claims, which are widely blamed for pushing up the costs of car insurance.

        But Catherine Barton, E&Y partner, said the effect – while uncertain – was likely to be “neutral at best” and warned that insurers may “have chosen to see the reforms through rose-tinted glasses.”

        The forecast fall in profitability this year comes after the industry enjoyed its best underwriting performance in five years in 2012, when it paid out an estimated £1.02 in claims and expenses overall for every pound in premiums.

        However, this was largely due to sharp increases in premium levels in 2011. Since then, insurers have been cutting prices, partly in anticipation of the legal shake-up. Ernst & Young said profitability in the sector “has already peaked”.

        Under the legal changes, personal injury lawyers and claims management companies will be banned from paying insurers and other parties fees for the contact details of car crash victims.

        The shake-up will mean that insurers lose millions of pounds worth of “referral fees” that they have earned by selling the details of customers involved in accidents that they have not caused, which has been an important part of some companies’ business models.

        However, the industry should receive a boost to underwriting profits from the expected fall in claims costs after the referral fee ban – costs that have been borne by insurers of drivers who cause accidents.

        Legal reforms will also cap the amount that successful claimants pay to personal injury lawyers in “no-win, no-fee” arrangements, which could make such schemes less attractive for solicitors. But claimants are still set to enjoy a 10 per cent increase in damages, resulting in higher costs for insurers.

        Any boost to underwriting income from the referral fee ban could also be limited by plans by some insurers to set up their own law firms. This would allow them to retain profit margins from lucrative personal injury work. Critics have warned questionable claims may continue as a result.

        LSE says openness is key to Clearnet

        Posted on 31 March 2013 by

        In coming weeks, the London Stock Exchange is set to close its 18-month pursuit of a controlling stake in LCH.Clearnet, the transatlantic clearing house. It is potentially its most significant deal in years.

        Last week, both sets of shareholders and UK regulators approved the transaction, in which LSE will take a 57.8 per cent stake, valuing LCH at €633m.

          “The LCH.Clearnet transaction could be transformational for London Stock Exchange Group,” says Peter Lenardos, an analyst at RBC Capital Markets. “The market continues to view the LSE as a volume-driven stock exchange. In reality it is transitioning to a diversified technology, intellectual property and risk management company.”

          Whether that potential turns into profit will be a challenge.

          Short-term, the deal will help LCH meet a €320m funding shortfall under tougher capital requirements that are being introduced for clearing houses in Europe to reflect their critical role in the functioning of financial markets.

          It is part of a global regulatory push to safeguard the world’s financial markets in the wake of the financial crisis. Authorities want to move more of the opaque over-the-counter derivatives market on to electronic trading venues and have trades processed through clearing houses. A clearing house stands between two parties, guaranteeing a deal in the event one party defaults.

          Xavier Rolet, chief executive of the LSE, sees these changes as benefiting his company and LCH, as open-ended derivatives contracts require regular risk management fees.

          Warehouse race

          IntercontinentalExchange, CME Group and London Stock Exchange are among those applying to run Europe’s electronic data warehouses, a component of a global push to reform derivatives markets, writes Philip Stafford

          The operators have been joined by the Depository Trust & Clearing Corporation of the US, and by Regis-TR, a venture between Deutsche Börse’s Clearstream and Spain’s Iberclear.

          The warehouses, known as data repositories, have become a key component of regulatory moves to safeguard markets since the financial crisis. They will keep records of buyers, sellers and prices and are meant to give authorities a better view of potential systemic risk in the $640tn swaps market.

          However, how best to achieve that goal is controversial in the US. CME and ICE have built their own operations and are offering it as an adjunct to the derivatives trading and clearing businesses they run.

          The DTCC, a clearing house owned mainly by its banking users, has argued that this approach will split data between repositories, fragmenting it and contravening policy makers’ aims, as laid down in legislation such as the Dodd-Frank act. Last month, the Commodity Futures Trading Commission, the US regulator, sided with the CME in the bitter dispute.

          Analysts said early proposals from the European Securities and Markets Authority have shown that the regional regulator is keen to stop
          a similar battle developing in Europe.

          “Esma will struggle to circumvent the current furore ongoing in the trade repositories space in the US,” said Virginie O’Shea, an analyst at Aite Group. “It has quietly indicated it’ll allow derivatives trades to be reported to any repository, rather than having them automatically routed by a clearing house. It hasn’t explicitly banned the CME practice. If there is any room left open to interpretation, then market participants will take advantage of these loopholes.”

          LCH would give the LSE the long-term growth market that it has lacked since it missed out on buying Liffe, the derivatives exchange, more than a decade ago. The LSE has agreed to contribute €185m cash for its pro rata participation, included in the purchase price.

          LCH is an attractive target as it is world’s largest clearer for interest rate swaps, which are used by big global banks and corporations to hedge against interest rate moves. It is also the second-largest clearer for repo trades, the main source of short-term funding for banks.

          Ian Axe, chief executive of LCH, has been transforming the clearing house from a broker- and user-owned utility into a more commercial business since his arrival from Barclays nearly two years ago.

          Senior management has been overhauled and LCH bought International Derivatives Clearing Group to expand in the US. Nasdaq OMX has also become a 5 per cent shareholder. LCH’s OTC clearing business, SwapClear, generated clearing revenue of €72m last year, up 62 per cent on a year ago.

          Yet underneath the optimism, some questions about LCH’s business model remain.

          The LSE is committed to retaining LCH’s so-called “horizontal” operating structure, allowing other trading venues to connect to it. However, rivals CME Group, IntercontinentalExchange and Deutsche Börse all run a “vertical silo”, which prevents other venues from accessing their clearing house.

          LCH’s SwapClear is governed by a group of banks that have agreed a profit-sharing deal with the LSE. How much will go to the LSE is unclear.

          Revenues from LCH’s cash equities business in the last five years have slumped to a quarter of what they were. Competition remains fierce in Europe.

          Observers and analysts expect the global regulations will mean investors turn to listed derivatives rather than OTC markets, but fees in LCH’s commodities and listed derivatives business have nearly halved to €105m in five years.

          From June, LCH will lose its revenues from NYSE Liffe as it switches to ICE European clearing house. But LCH will begin clearing for NLX, the new European fixed income trading platform set to be launched by Nasdaq OMX, in April.

          “It’s a real mixed bag,” says Richard Perrott, an analyst at Berenberg Bank in London. “Some parts of it, like repo, are great. The price isn’t too high but what you’re getting isn’t a slam dunk by any means. They are relying on adding new services,” he said.

          Mr Rolet plans on expanding the scope of Turquoise and MTS, the LSE’s equity derivatives and fixed income trading platforms, and using FTSE International, the index compilation group.

          He is undeterred by critics. “Open access, we believe, is a superior economic model for the operator,” he said last month when the final deal terms were announced. He will soon have the chance to demonstrate it.

          Bargain basement banks not such a bargain

          Posted on 31 March 2013 by

          A woman walking past a branch of the Bank of Cyprus branch in Nicosia, Cyprus 27 March 2013 as the country's banks remain closed. Cyprus banks will are expected to open early 28 March. Temporary measures will be placed on transactions when they do re-open despite the EU/IMF bailout deal which will see larger depositors lose money.©EPA

          Is it time to buy European banks?

          This column last posed that question in June, and concluded – from an analysis of their balance sheets and accounts – that banks were cheap, but there was no “margin of safety”.

          Buying bank shares remained an almost pure bet on the broader progress of the eurozone crisis.

          So it proved. The FTSE-Eurofirst banks index rallied 72 per cent from last summer’s lows, and this was far more attributable to three words from Mario Draghi of the European Central Bank – “whatever it takes” – than to any developments at the banks themselves.

            Now, the crisis in Cyprus – the worst alarm in the eurozone since then – has produced what optimists might call a nice buying opportunity.

            Eurozone bank share prices have tumbled 21 per cent – a new bear market – in a matter of days, and are now at their lowest since last September.

            On some measures of valuation, they also look more attractive.

            European bank shares trade on only 63 per cent of their book value, up from the bargain basement 46 per cent level last summer, but still mighty cheap. The valuation gap between European bank shares and those in the US, which now trade on 95 per cent of book value, is at its greatest since 2004.

            And the European multiple itself is no higher today than it was in July 2011, even though repeated actions and words from the ECB since then have shown that banks will not be allowed to go down without a fight.

            At such valuations, banks look a buy on almost any outcome, other than a disaster.

            But this is when the optimism must stop. Cyprus has set important precedents, which cannot be reversed.

            First, the initial proposal to deal with the problem proposed taxing insured deposits. Even though this was quickly abandoned, the fact that reneging on deposit insurance was even considered was a hugely important precedent – which greatly increases the vulnerability of the European banking system as a whole to runs by depositors.

            In an ideal world, deposit insurance would not be necessary, and the job of vetting banks could be left to depositors. Even in a world of insurance, the insurers would ideally do a good enough job to stop banks from growing insolvent and putting depositors’ money at risk. But this is not an ideal world, and this was far too early to propose reining in deposit insurance.

            Second, Cyprus’s capital controls effectively mean that the currency union is no longer in full force, as Cypriot euros are not fully convertible for other euros. This is another important precedent.

            Third, the focus on the scale of Cypriot banks’ assets in comparison to the island’s economy has brought attention to a few other small centres with huge banking systems in proportion to their size. Names such as Malta and even Luxembourg, the EU’s wealthiest nation, are now mentioned.

            Finally, come the ill-advised words of the Eurogroup’s president, Jeroen Djisselbloem, who made clear that “bail-ins” will be the norm in future. Banks’ creditors, of whatever seniority, can expect to have to chip in for any future rescues.

            What are the concrete effects of all these changes on bank stocks?

            Any bank with a high loans-to-deposits ratio will be obliged to raise its capital ratios. Any way of doing this – from disposing of assets to selling new equity – will be bad for the share price. As it is obvious that there will be a greater supply of bank equity, its price will have to fall to attract buyers, making bank equity less attractive as a source of funding.

            At the same time, even the most senior bank credit has now become less appealing to investors. Deutsche Bank’s Jim Reid demonstrates this dramatically by showing the spread between senior financial debt and low-quality crossover (ie between investment and non-investment grade) debt. That ratio, once as high as 33 times pre-Lehman, is now down to its most compressed level ever, at about 2.5 times. It will be more expensive for banks to raise credit.

            And, of course, it will be far harder to take in deposits. Depositors are likely now to start differentiating. Banks in jurisdictions that have raised the most concerns to date will find life harder. Figures from SNL Financial show that loan-to-deposit ratios are far higher in Europe (at 106 per cent) than in the US (69 per cent). Banks with high ratios must already rely very much on other sources of funding. That reliance can only increase, meaning that such banks will need to hold larger reserves of liquidity – making them less profitable.

            So, while eurozone banks are now cheap, they are not a bargain.

            Berenberg Bank suggests buying conservatively-run banks with low loan-to-deposit ratios, such as HSBC, UBS or Handelsbanken. But the rational course for equity investors – doubtless now being put into effect by hedge funds – is to sell short the shares of other banks that look more vulnerable. This is inherently dangerous. But the policy response to Cypriot events of the last two weeks has encouraged investors to do just that.


            Cyprus seeks to find people behind bank crisis

            Posted on 31 March 2013 by

            The hunt in Cyprus to find the “guilty men” responsible for the country’s banking disaster promises huge political upheaval domestically, but the crisis will have potentially more worrying consequences for its relationship with the EU.

            Heads have already rolled at the two main banks – Bank of Cyprus and Laiki Bank – where the entire boards were sacked last week. And there is also severe pressure on the governor of the central bank, Panicos Demetriades, who has refused an unofficial request to resign to take the blame for the country’s financial ruin.

              The open conflict between Mr Demetriades, who was appointed last year by the now-ousted Akel communist party, and the conservative President Nicos Anastasiades over the bailout, foreshadows further political tensions in the rough economic years ahead.

              The fallout could also lead to jail time for some important figures on the island.

              An investigative committee of former Supreme Court judges will on Tuesday start looking into culpability, with a view to prosecutions when the information is presented to the attorney-general in three to six months.

              Mr Anastasiades said that the committee would have “a clear and wide-ranging mandate” to investigate “criminal, civil and political offences” in the lead-up to the crisis, adding that there was a “justifiable sense of anger” among the people.

              This comes amid news over the weekend that deposits of more than €100,000 in the Bank of Cyprus could see as much as a 60 per cent write-off – far more than the 40 per cent originally thought – another blow to local business.

              But once the dust settles after the blame game, it is the country’s relations with the EU that analysts say is likely to be the biggest political casualty of the crisis.

              Many Cypriots acknowledge that as a nation they bear responsibility for the banking crisis, but feel that the EU was unnecessarily harsh in imposing bailout terms, and thus to an extent see themselves as victims of outside forces.

              They hold the rivalries of an election year in Germany partially responsible, with all political parties there determined to place tough preconditions on any bailout. They also blame what they describe as a clash of economic principles between northern and southern European nations.

              “When the elephants fight, it’s the grass that suffers the most,” said Michael Tyrimos, chief operating officer at Nicosia-based software group Exelia Technologies and co-founder of a group promoting local entrepreneurship.

              “Joining the euro is looking like a big mistake, as we sacrificed the autonomy we had over our own economic policy,” he added.

              In nearby Greece, since their crisis began in 2010, the proponents of leaving the eurozone were often associated with the radical populist left, such as the Syriza party. But in Cyprus over the past two weeks strong anti-EU sentiment has quickly entered mainstream political discourse.

              Nicholas Papadopoulos, chairman of the parliamentary finance committee, told reporters that leaving the euro was a “valid point that needed to be explored” last week, forcing Mr Anastasiades to reassure it was not an option.

              Afxentis Afxentiou, former governor of Cyprus’s central bank from 1982 to 2002 and an advocate of the country’s 2008 entry into the eurozone, said: “If we knew at the time what might eventually happen, we might not have been so willing to join.

              “It seems they wanted to punish Cyprus,” he said of the EU and Germany in particular, sitting in his office at a local law firm.

              The anger has been palpable on the streets. Susanna Chrysonthou, a worker in the now stricken financial services sector, last week tried to retrieve cash from the joint account she shares with her elderly father.

              “He worked for that money 15 hours a day, seven days a week, for the past 40 years so that some corrupt government hierarchy could take it away. I don’t think that’s fair at all. The public feels very betrayed.”

              The effects of an economy expected to shrink by 10-15 per cent this year is likely to fuel further anti-EU sentiment and political instability, potentially resulting in Cyprus drawing closer to Russia, according to local analysts and business figures.

              Faith in the local political establishment has also been shaken by a list published in the Greek papers of current and former Cypriot state officials who allegedly had their loans written off by banks over the past five years. An official investigation has been launched.

              The only public institution who has come out relatively well from the crisis so far has been the financially powerful Orthodox Church, which is one of the island’s biggest landowners.

              “All the land that belongs to the church is at the state’s disposal to help the people so that the banking sector does not collapse and so we can stand on our own feet,” said Archbishop Chrysostomos last week to local reporters.

              Additional reporting by Quentin Peel

              Blow for ECB as wider loan rates hit south

              Posted on 31 March 2013 by

              A logo of the European Central Bank at its headquarters in Frankfurt©AFP

              Divergences across the eurozone in interest rates paid by businesses on bank loans have reached record highs, despite European Central Bank action to prevent Europe’s monetary union fragmenting.

              Widening differences in borrowing costs, shown in an analysis by Goldman Sachs, highlight how ECB measures have prevented a catastrophic eurozone break-up – but failed to ease crippling credit conditions in much of the region’s southern periphery, where economic growth prospects remain bleak.

              Eurozone fragmentation

              Eurozone fragmentation

                Since mid-2012, the spread between yields on Spanish and Italian sovereign 10-year debt and the German equivalent has narrowed significantly. Goldman Sachs’ interest rate divergence indicator – measuring cross-border variations in interest rates charged by eurozone banks on a variety of business loans – also dipped initially.

                But the indicator has since risen again and reached a record of 3.7 percentage points in January, indicating companies in southern Europe were paying significantly higher interest rates than northern rivals.

                “Market segmentation remains, divergence in bank lending rates persists and, as a result, immediate growth prospects in the periphery are bleak,” said Huw Pill, European economist at Goldman Sachs, who was previously a senior monetary policy official at the ECB in Frankfurt.

                The results will disappoint Mario Draghi, the ECB’s president, ahead of the meeting of its governing council on Thursday. They highlight the challenge the ECB faces in ensuring low official interest rates feed through into lower borrowing costs, especially for job-creating small businesses in countries such as Italy and Spain.

                In much of the eurozone periphery, small companies depend heavily on bank finance. Contagion effects from the crisis in Cyprus – not yet reflected in the Goldman Sachs indicator – may have intensified further the financing pressures they face.

                Since taking office in November 2011, Mr Draghi has battled against the eurozone’s financial fragmentation – first by injecting more than €1tn in cheap three-year loans into the financial system and then by pledging last July to do “whatever it takes” to ensure the eurozone’s integrity.

                Reasons for the latest widening in interest rates paid by business are not obvious – but could include heightened tensions ahead of Italy’s elections in February, a further weakening in banks’ finances, or a reversal of the initial improvement in financial market sentiment that followed ECB policy actions.

                Worries about the depth of the recession hitting the eurozone’s south have fuelled expectations that the ECB will cut official interest rates further. The ECB’s main policy rate has been held at 0.75 per cent since last July.

                Church of Cyprus wins bailout lawsuit

                Posted on 31 March 2013 by

                The ink was barely dry on the bailout of the Cypriot banking system last week when the legal challenges began rushing in, with local lawyers backed by influential business figures already winning some small victories.

                The first serious challenge was launched by the Church of Cyprus, which has big business interests on the island, questioning the legality of shareholders in the Bank of Cyprus having their equity stakes taken as part of the bailout mechanism.

                  “The expropriation of property is contrary to the constitution of Cyprus and the European Declaration of Human Rights,” said Kypros Chrysostomides, partner at local tax firm Dr K Chrysostomides.

                  The Church, which owns equity in the Bank of Cyprus, successfully petitioned the government through the courts to reverse the decision last Thursday. As a result, all shareholders in the Bank of Cyprus would be issued new Class D shares that had few voting rights, the government said on Sunday.

                  Late on Friday, a group of local lawyers from Stelios Americanos said they had won an interim injunction to block the haircut on the deposits of its plaintiffs in the Bank of Cyprus, which is the very heart of the bailout mechanism.

                  Officials said that this would probably be resolved without it going to court, as the finance ministry and the central bank have the right to appear before the Supreme Court to try to lift the injunctions.

                  But if not, it could take months or even years to resolve, further complicating the bailout process. “Usually the courts will take more than a year to decide such an issue,” said Alecos Markides, the former Cypriot attorney-general and member of parliament and now a partner at Markides, Markides & Co, the local law firm.

                  Similar attempts at legal action are expected from companies around the world attempting to protect their deposits which, even if unsuccessful, are set to further muddy the already complex legal situation surrounding the bailout. The Financial Times has been contacted by several Russian lawyers outlining litigation options for their clients.

                  Speaking on condition of anonymity, several businesses in Ukraine, a country estimated to have several billion US dollars parked in Cyprus’s banks, said they were contemplating legal action to protect their deposits and right to free financial flows.

                  The third main legal issue to have arisen this week is widespread claims that ordinary Cypriots were mis-sold high-risk securities in the Bank of Cyprus and Laiki bank, not understanding the risk they were taking.

                  The government has decided to create a special arbitration body to deal with bondholders who claim they were misled into buying high-risk securities.

                  Additional reporting by Courtney Weaver

                  Rush to find Cypriot cash escape route

                  Posted on 31 March 2013 by

                  Cyprus Bank©Bloomberg

                  The hunt is on to find ways to circumnavigate the new draconian capital controls in Cyprus and get money off the island.

                  At least three people have attempted to flee the island in recent weeks with more than €200,000 in cash on their person, according to official sources. The money was in all cases confiscated and the people questioned by the authorities.

                    Individuals have only been allowed to take €1,000 a day out of the country since Thursday under strict capital controls designed to prevent a bank run. The imposition of the eurozone’s first ever capital controls followed the re-opening of the country’s two banks for the first time after the European Union and International Monetary Fund bailout.

                    Amid the financial confusion that has characterised recent weeks, police have stepped up their security at the marina in the southern town of Limassol, in a bid to combat those trying to get money off the island by boat. Others have, it seems, approached the problems with more sophistication.

                    Sergei Tyulenev, a Russian businessman, says he received a call on Thursday – the day the capital controls were implemented – from Cypriots he did not wish to identify offering to help him move what he implied was more than €1m out of a collapsing local bank.

                    The move would have seen his money transferred from the now-failed Laiki Bank, where deposits over €100,000 are likely to see substantial write-offs, to Hellenic Bank, a comparatively healthy Cypriot bank.

                    There was a catch though, on top of the illegality of the move. “They said I had to pay €200,000 up front. I refused,” said Mr Tyulenev, speaking from Limassol, a town dubbed “Limassolgrad” for its high proportion of Russian residents.

                    The Financial Times has seen no official reports of illegal financial dealings at the banks. Those calling Mr Tyulenev may not have been able to follow through with their offer or may have been stopped in their attempts by the financial regulators.

                    But concerns have also been raised in Brussels that politically-connected depositors on the island have been able to move their cash out of Laiki and Bank of Cypus, even though banks were closed from the start of the crisis.

                    “There are some dubious capital outflows out of Cyprus as we speak,” one senior eurozone official directly involved with negotiations with Cypriot officials said before the banks had reopened. “I’m sure it’s ‘the friends’, and the friends are not only Russians.”

                    Many foreign depositors had already sought to move money out of Cyprus by legitimate means before the crisis struck, seeing the writing on the wall for the banking sector as early as from the end of last year.

                    Some 18 per cent of the deposits held in Cypriot banks by residents of other eurozone countries were pulled out in February, according to figures from the Central Bank of Cyprus. Such deposits in Cyprus had fallen 41 per cent since last June to €3.9bn.

                    But there are also concerns that large sums flowed out of the two banks just before the first bailout package was signed in the early morning hours of March 16, and an inquiry has now been launched looking into who took money out and what knowledge they had at the time.

                    Additional reporting by Peter Spiegel

                    Bank of Cyprus – the noose tightens

                    Posted on 31 March 2013 by

                    The noose is tightening around Bank of Cyprus. The stricken island’s number one lender is being frogmarched dangerously close to the same fate as Laiki Bank, the number two. Laiki is being dismantled as part of the €10bn bailout; only its insured deposits up to €100,000 are untouched. The Cypriot central bank now says that uninsured depositors above the same threshold at Bank of Cyprus could see 60 per cent of their savings eaten up in its restructuring – far more than they were led to believe last week. The more the Cyprus crisis unfolds, the more likely it becomes that Bank of Cyprus will be devoured too.

                      The bank’s uninsured depositors will get shares – with voting rights and dividends, you lucky people – in exchange for 37.5 per cent of their net deposits over €100,000. A further 22.5 per cent will be frozen and may be converted into shares later. The other 40 per cent will be unfrozen “in a short period of time”. An independent valuer will assess what Bank of Cyprus is worth for the purpose of this forced exchange. That should not be too difficult. With the island’s economy predicted to shrink by up to a quarter as the rigours of the bailout take hold – as happened in Greece – and bad loans sure to jump, the earnings outlook at Bank of Cyprus is dire. Its share price has fallen nearly 95 per cent in the past two years as Cyprus fell victim to contagion from Greece and its own calamitous policy errors. Its residual equity value has been wiped out by the rescue package.

                      One ray of hope for the eventual emergence of Bank of Cyprus as a viable business comes from Ireland. Bank of Ireland escaped full nationalisation when the nation’s banks collapsed. It is now 40 per cent owned by a group of US investors, which put €1bn into its recapitalisation in 2011. Cyprus and its banks, alas, are a long way from such a moment.

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