Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Currencies

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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Archive | November, 2016

Debt fund trio raise $73bn in five years

Posted on 31 August 2014 by

The top three private debt funds raised more than $73bn in the past five years, underlining the appetite for alternative credit at a time when banks are under pressure to shrink their balance sheets in the wake of the financial crisis.

According to a Private Debt Investor survey, the top fund raiser was Dallas-based Lone Star Funds, which collected $28bn from investors including major pension funds, followed by Oaktree Capital Management with $23bn and Apollo Global Management at $22bn.

    Most of the 30 funds included in Private Debt Investor’s list are distressed specialists and only one in the top 10, fifth-placed M&G Investment Management of the UK, is based outside the US, illustrating how little risk capital there is beyond US shores. Together the 30 funds raised a total of $318bn over the past five years.

    The total is unchanged from the past survey a year ago, demonstrating how distressed debt funds are continuing to draw new investor money even as the financial crisis eases.

    Lone Star and its peers have benefited as banks have come under pressure from regulators to sell assets to boost their capital ratios. Lone Star, founded by John Grayken in 1995, has bought several loan portfolios from Germany’s Commerzbank, including its UK real estate portfolio in partnership with Wells Fargo, and its Spanish loan portfolio, together with JPMorgan.

    Similarly Oaktree bought a shipping loan portfolio from the UK’s Lloyds bank.

    Apollo, which topped the list last year, dropped to third place for the period from January 2009 to the start of June 2014. However, Apollo has $106bn in total credit assets when debt investments are more broadly defined.

    The methodology that Private Debt Investor uses includes investors in the debt of private companies, leveraged buyouts, infrastructure and real estate. But it excludes high yield funds, hedge funds that trade debt but do not hold it for any period, and collateralised loan obligations managers.

    Jim Zelter, head of Apollo’s credit business, said growth in the alternative credit industry was driven by institutional investors seeking diversity, which ranged from yield to opportunistic.

    While distressed investors enjoyed tailwinds from the financial crisis, zero interest rates have meant that in recent years the debt burden of even highly levered companies has become easier to bear.

    The opportunity to invest in companies with unsustainable balance sheets has shrunk – at least for the time being, leading Oaktree, for example, to actually return money to investors.

    It also focuses on capital raising in the past five years so does not necessarily indicate market power.

    Pimco is included at number 17, while BlackRock, the world’s largest fund manager, does not appear at all. Neither does Centerbridge Partners, which along with Oaktree, Apollo and Blackstone, is regarded as a specialist distressed debt investor.

    Goldman Sachs is the only bank to appear on the list.

    Caixabank buys Barclays’ Spanish business

    Posted on 31 August 2014 by

    The rapid consolidation of Spain’s banking sector took another important step forward, after Caixabank revealed on Sunday night that it was buying Barclays’ Spanish operations for €800m.

    The deal adds 250 branches and 550,000 new clients to the Barcelona-based group, along with assets worth €21.6bn. It will cement Caixabank’s position as the largest retail bank in Spain, and strengthen its footprint in Madrid, one of Spain´s richest regions and a longstanding target for the bank’s expansion drive. Caixabank is buying Barclays’ retail bank, wealth management business and commercial banking business in Spain, but not its credit card and investment banking arm.

      The acquisition looks certain to bolster the increasingly dominant grip of Spain´s top three banks – Banco Santander, BBVA and Caixabank – over the nation´s banking market, at a time when optimism is rising that Spain is set for a period of above-expectation growth. It comes only weeks after BBVA snapped up Catalunya Banc, one of the last former savings banks nationalised by the government in 2012 that was still in state hands.

      “[Barclays Spain] has a default ratio below the average in the sector and an increased solvency rate, demonstrating the high quality of its assets and its sound management,” Caixabank said in a statement. According to one person familiar with the deal, the UK bank’s retail operations in Spain also boast a particularly large share of well-off clients, with deposits of at least €100,000.

      Gonzalo Gortázar Rotaeche, the Caixabank chief executive, said: “This acquisition will enable us to enhance our personal and private banking businesses in Spain, strengthening our counselling offer to our customers, and will enable us to accelerate organic growth due to the improving economic context.”

      Antony Jenkins, Barclay’s chief executive, said in a statement: “We announced Barclays’ strategy update in May this year, creating the Barclays Non-Core cluster containing, amongst others, our Spanish retail banking business. We were clear that this business, while not central to Barclays’ strategy, could be attractive to another owner – and today’s announcement reflects that perspective.”

      Morgan Stanley advised Caixabank on the deal.

      Carlyle settles to avoid trial by jury

      Posted on 31 August 2014 by

      Carlyle has brought to an end allegations that the world’s largest private equity groups conspired to fix the prices of leveraged buyouts, by agreeing to a settlement ahead of a jury trial.

      The Washington-based fund manager was the only private equity group that had refused to settle. It now has agreed to pay $115m to resolve the legal matter, an amount similar to those paid by rivals Blackstone and TPG, a person with knowledge of the accord said. The group denies wrongdoing and does not regard this settlement as an admission of guilt, the person added.

        The decision follows similar settlements from rivals Bain Capital, Blackstone, Goldman Sachs, KKR, Silver Lake Partners and TPG, which paid a combined $475m to avoid a trial that would have exposed email exchanges between their dealmakers giving the impression they were colluding to limit competition for assets. Carlyle’s move takes place days before a district court judge was due to issue a preliminary ruling on whether the case merited class-action status – and a ruling that could have determined whether plaintiffs could seek as much as $10bn in damages.

        Carlyle declined to comment.

        The litigation, which had been making its way through district court in Massachusetts since 2007, was predominantly based on damaging emails, some revolving around the $33bn purchase of US hospital group HCA by Bain Capital, KKR and Merrill Lynch in 2006 – then the largest leveraged buyout in history.

        In one email, David Rubenstein, co-founder of Carlyle, rejected competing with KKR, saying: “I don’t want to be in a pissing battle with KKR at the same time we are teaming on other deals.”

        After KKR decided to settle last month, Carlyle became the last remaining private equity group still willing to fight in court. It said at the time: “These claims are without merit and we will continue to vigorously contest the allegations.”

        But the financial risk “was extraordinarily high” compared with the relatively limited amount needed to settle the case, according to one lawyer who was involved in some of the previous settlements. The prospect of facing a jury in November, with an unpredictable outcome, may have deterred Carlyle for good, lawyers said.

        Bain Capital, Goldman and Silver Lake settled by agreeing payments of $54m, $67m, and $29.5m respectively.

        The longer the private equity groups waited to negotiate a settlement, the more expensive it became. The $325m settlements that Blackstone, KKR and TPG agreed await court approval this week.

        German business attacks ‘complacent’ Berlin

        Posted on 31 August 2014 by

        The German flag flys outside the Reichst©AFP

        Germany has become “overconfident” and “complacent”, with the government pursuing policies that put the country’s hard-won competitiveness at risk, some of Germany’s top business leaders warn.

        Analysis – Germany: In a spin

        DUISBURG, GERMANY - JANUARY 13: A worker, at the photographer's request, walks among finished rolls of galvanized steel at the ThyssenKrupp steelworks on January 13, 2010 in Duisburg, Germany. Recent economic data, including better-than-expected unemployment figures and a positive trend in manufacturing orders in the last quarter, are giving economists hope that the German economy is recovering faster than expected from the effects of the global financial crisis. ThyssenKrupp is Germany's biggest steel producer and is building new mills in Brazil and Alabama. (Photo Illustration by Sean Gallup/Getty Images)

        With growth slowing, the problems facing the economy – from the Ukraine crisis to rising energy costs – will have an impact beyond its borders

        Their criticisms of chancellor Angela Merkel’s government come as Europe’s largest economy is showing signs of slowing, raising concerns about its ability to continue driving growth in the stagnant eurozone.

        Their remarks follow the introduction of policies fiercely opposed by corporate Germany such as the introduction of a minimum wage and a reduction in the retirement age to 63 for certain long-serving workers.

        “I think the biggest threat right now is really a kind of overconfidence in Germany, and with that comes a little bit of complacency,” said Kurt Bock, the chief executive of BASF, the world’s biggest chemical maker by sales.

          He said: “In general the feeling . . . is that we’re doing well, we have money to spend, we have relatively low unemployment, so what’s the problem?

          “I think that is a big risk. You can see it in German government policies that we are not really growth-orientated or business-friendly, but rather much more orientated towards the distribution of wealth and serving the expectations of certain stakeholders.”

          Markus Kerber, managing director of the BDI, the German industry association, said: “Germany is now in a very good position. But in the next 10 years every economy in the developed world must change. …[In Germany] the reform agenda is not making the progress that it did in previous years.”

          The DIHK, the national chamber of commerce, has also railed against the recent policy moves.

          Germany continues to enjoy low levels of unemployment and an almost-balanced budget; even consumption, once languid, is growing.

          However, poor second-quarter GDP figures have underscored the vulnerability of the export-driven German economy to external shocks, such as from Russia and Ukraine. GDP dropped 0.2 per cent in the three months to June, compared to the previous quarter.

          Germany’s lacklustre performance threatens to make the European Central Bank’s battle against low inflation even harder and could make quantitative easing more likely.

          Mr Kerber urged the government to “switch back from public consumption to public investment”, for example by focusing future spending increases more on infrastructure and less on pensions. He argued that the Merkel government was reaping the rewards of the tough policies enacted in the early 2000s by her Social Democrat predecessor, Gerhard Schröder.

          Stefan Heidbreder, managing director at the Stiftung Familienunternehmen, a foundation for family-owned businesses, said: “Germany is still in a good position, compared to other countries. That is thanks to its companies and less to do with the policies of the government . . . The experience of our neighbour, France, shows that doling out lots of money for social benefits and intervening to limit freedom to conduct business are the wrong course.”

          A leading German investment banker was more blunt, describing recent government policies as a “disaster”. “Germany risks forgetting everything it has worked hard to achieve in order to just please the electorate. That’s my key concern right now,” the banker said.

          Mr Bock said the new government coalition’s energy reforms had failed to tackle the underlying weaknesses in policy which has left industry facing uncompetitive costs.

          Emaar’s Dubai IPO marks regional revival

          Posted on 31 August 2014 by

          Emaar Properties, owner of one of the world’s biggest shopping centres, has set the initial public offering of its malls business in Dubai for October, in what could be the largest share sale in the United Arab Emirates since the financial crisis, underscoring the region’s revival.

          The sale reflects a resurgence of investor interest in Dubai on the back of a revival of its property and tourism sectors. Amid political uncertainty in the Middle East, the UAE has emerged as the safest location in the region and has attracted substantial investment.

            A successful IPO on the Dubai Financial Market could encourage others to follow and would be a further boon for the UAE, which in June was upgraded by the MSCI index from the investor category of frontier market to emerging market.

            Emaar Properties, whose developments include The Dubai Mall and Burj Khalifa, the world’s tallest building, said on Sunday that it expected to list at least 15 per cent of its malls business in the offering, which was first announced in May.

            The bookbuilding will begin later this month.

            The malls business is one of Emaar’s high-performing subsidiaries and recorded revenues of $340m during the first six months of this year, an increase of 13 per cent from the previous year.

            Mohamed Alabbar, chairman of Emaar Properties, which is about a third owned by Dubai’s government, said: “The IPO of EMG is a milestone for the development of the UAE capital markets as, for the first time, it combines institutional and retail shareholders in the same offering.”

            Seventy per cent of the offering will be made available to institutional investors, with the remaining 30 per cent targeting individual investors. Emaar did not state a valuation for the IPO but said it had earmarked about $1.44bn from the IPO proceeds to be paid as a dividend.

            The emirate has been investing heavily into its airports and aircraft, public transport and hotels to attract tourists to the region. Dubai’s tourist numbers rose 10 per cent to 11m in 2013, and this year its economy is expected to grow about 5 per cent, according to the Dubai Statistics Centre.

            The listing is a boost to the Dubai Financial Market, which lost out to London for the listings of other regional companies including Dubai developer Damac and Abu Dhabi-based oil services provider Gulf Marine Services.

            Emaar Properties had initially suggested that it might choose London for the listing, but it received a regulatory waiver allowing it to list a minority stake in Dubai.

            Renzi and Hollande in a bid for reform

            Posted on 31 August 2014 by

            ©AFP

            Matteo Renzi and François Hollande may be struggling to deliver structural reform but they can at least see the need for it.

            In his first speech to parliament as Italian prime minister, back in February, Mr Renzi accurately labelled Italy “a rusty country, a country bogged down, chained by stifling bureaucracy, rules, regulations and codes”. This week the French president removed the leftwing Arnaud Montebourg as economy minister, replacing him with Emmanuel Macron, Mr Hollande’s own former chief economic adviser and a well-known champion of deregulation.

              There is no doubt that rationalising regulation would help growth in many EU economies in the medium term. France presently comes a poor 38th out of a total of 189 countries in the World Bank’s Doing Business rankings on business climates. Italy is 65th, the second-lowest EU country after Greece and lower than such exemplars of world-class administration as Kazakhstan and Belarus.

              Italy’s judicial system, for example, is choked with self-serving, growth-stifling bureaucracy. The World Bank reckons it takes nearly 1,200 days to make an enforcement claim under an Italian contract against the rich-country average of 529 days. In France, due in part to the country’s notorious notary profession, it takes 50 days and eight separate procedures to register a property, again about twice the rich country average.

              Messrs Renzi and Hollande have identified the problems, but their attempts to push through reform have made little headway against special interests and inertia.

              Unlike Greece and Spain – also economies in serious need of structural reform – France and Italy avoided having to turn to the International Monetary Fund for help during the eurozone sovereign debt crisis. But that also meant that the IMF was not available to play its traditional role as a political cover for reform-minded politicians. (A lack of reform impetus is evident in many emerging markets for the same reason.) Without that excuse, Mr Renzi and Mr Hollande have to expend their own political capital on pushing opponents aside, and Mr Hollande in particular has a deficiency of that particular commodity.

              Still, a case for structural re-form, skilfully made, could appeal not only to an abstract notion of efficiency but also to those who lose out from the current system.

              For example, France and Italy – also Spain – are notorious for their two-tier labour markets, a core of relatively well-paid full-time workers protected by employment legislation and a periphery of insecure, often temporary, low-wage jobs. The issue is not to destroy all labour market protection or worker representation: it is to orient it in a way that creates as many secure and high-wage jobs as possible, not just for a privileged elite. Similarly, the stifling effect of the Italian judicial system and of French notaries are not victimless crimes: the companies whose operations they complicate should be the most effective supporters of reform.

              Apart from the increasingly urgent need for the European Central Bank to support growth with looser monetary policy, and an easing of the EU’s self-destructive fiscal rules – the proximate cause of the ructions in the French cabinet – there are no straightforward answers to getting economies to grow in the near term. Yet a problem with so many EU economies is not just that they are operating so far below capacity but that their capacity is so much lower than it could be.

              Mr Renzi and Mr Hollande need all the luck and support they can get. Overcoming entrenched interests to reform an industry or a profession is one of the toughest things a politician can do, and they will need both skilful domestic political management and backing from outside to achieve it.

              Rate decisions to provide week’s focus

              Posted on 31 August 2014 by

              Monetary policy announcements lead the week’s data releases with rate decisions from the Bank of England, European Central Bank and Bank of Japan due on Thursday.

              A range of activity indicators are also available this week with August Purchasing Managers’ Index data for UK manufacturing and services out on Monday and Wednesday and their US equivalents, the ISM’s, out tomorrow and Thursday respectively. Major US labour market measures are released later in the week with August non-farm payrolls out on Friday. Official data on German industrial activity for July are also out on Thursday and Friday.

                Little action is expected from the BoE on Thursday. We know two members of the Monetary Policy Committee voted to raise rates at last month’s meeting, but lower than expected inflation and the weak wage growth since then are unlikely to push the MPC consensus to raise rates in September.

                Analysts at Investec note the impact of next May’s UK general election on a rate rise and that historically rates remain fixed in periods close to polling days. Investec expects the rise to come as early as November this year given “the clear recovery in the economy and improving credit availability”.

                Of greater consequence will be the ECB announcement following shortly after the BoE’s. News last week that euro area inflation fell to an expected five-year low of 0.3 per cent, combined with Mario Draghi’s comments at Jackson Hole have led analysts to expect the tone of this month’s meeting to be overly dovish.

                Despite deflation fears no actual policy change is expected this month, but affirmation of the ECB’s commitment to price stability is, which will further open the door to the use of extraordinary measures such as asset purchases in the near future. Analysts at HSBC expect to see purchases of asset backed securities towards the end of this year with outright bond buying beginning sometime in early 2015.

                Policy makers at the BoJ are expected to maintain their wait-and-see stance; inflation is holding firm and any policy change before the end of the year is very unlikely.

                US labour market data, released on Friday, are expected to show further gains in US employment. The consensus expects the US economy added 220,000 jobs in August up from 209,000 in July; a fall in the unemployment rate to 6.1 per cent is expected to coincide.

                UK PMI’s are expected to show a slight weakening in manufacturing activity for August. The consensus expects a reading of 55.1, down from 55.4 in July, still indicating expansion in the sector as the UK economy outperforms its global peers. The UK services sector hit a new PMI high for 2014 in July of 59.1; a slight softening from this is expected in August with a consensus reading of 58.5.

                US manufacturing as indicated by the ISM survey is also expected to soften in August to 56.8, down from 57.1 in July, but still well above the 50 level that indicates expansion in the sector. The non-manufacturing ISM hit the highest level since December 2005 last month with a reading of 58.7; again a slight softening is expected for August with a reading of 57.4.

                German factory orders for July, released on Thursday, are expected to rebound from two successive months of decline, the consensus expecting a 1.4 per cent increase after falling 3.2 per cent in June. Industrial output figures for Germany, out on Friday, are expected to show a modest gain on 0.5 per cent on June.

                Rate decisions from the Bank of Canada and the Swedish Riksbank are also announced on Wednesday and Thursday respectively.

                Private equity’s oil interests go global

                Posted on 31 August 2014 by

                North Sea oil rig©Getty

                Mustafa Siddiqui is enjoying a change of scene. He’s just arrived in the UK to head up Blackstone’s energy investments in Europe – the first time they’ve been run out of London, instead of New York.

                That highlights a phenomenon that is changing the shape of the oil industry: private equity’s interest in oil, once largely focused on North America, is going global.

                  “There’s a lot of virgin ground outside the US and the competition is thinner,” Mr Siddiqui, a managing director at Blackstone, told the Financial Times.

                  Private equity has long been a big investor in energy, especially in the US. Buyout groups have piled into oil and gasfields, oilfield service companies, power plants, utilities and wind farms.

                  Some of the most successful oil companies of recent years were backed by private equity. The standout example is Kosmos Energy, the small explorer initially funded by Warburg Pincus and Blackstone, which discovered the massive Jubilee oilfield off the coast of Ghana in 2007.

                  Kosmos is no longer an outlier. More and more buyout groups are investing in the high-stakes business of finding and producing crude. Global private equity-backed oil and gas M&A has totalled $5.9bn so far this year, according to Thomson Reuters – up 48 per cent on the same period in 2013.

                  “Private equity and the national oil companies are the only pots of money chasing exploration right now,” says Nick Cooper, chief executive of Ophir Energy, the Africa-focused junior. “And when it comes to start-ups, PE is virtually the only source of funding.”

                  That’s a big change from the situation just a few years ago. The exploration scene was dominated by western majors like BP and publicly listed independents such as Tullow Oil and Ophir, a group that was behind a string of spectacular discoveries in Africa.

                  But the landscape is shifting. Quoted explorers are finding it hard to raise funds, as capital markets sour on oil exploration. The majors, under pressure from shareholders to improve returns, are curbing spending and shedding assets. And US-headquartered independents have gone back home to ride the shale boom.

                  “That’s opening up a lot of investment opportunities elsewhere in the world, and private equity is stepping in,” says Will Honeybourne, a managing director at First Reserve.

                  First Reserve, along with Riverstone and Warburg Pincus, were pioneers of oil investment. Now others, such as Carlyle, Apollo Global Management and KKR, have got in on the act, raising dedicated energy-focused funds or building up their own specialist teams to invest in the oil and gas space.

                  Last year, Carlyle committed up to $200m in Discover Exploration, a start-up that has been drilling for oil off the coast of New Zealand. Blackstone, which raised its first, $2.5bn energy fund in 2012, has just announced a $250m investment in Siccar Point Energy, a new UK-based oil company focused on the North Sea. The New York-based group is now seeking $4bn for a new energy-dedicated pool, according to people with knowledge of the matter.

                  The groups’ recent forays into oil differ markedly from standard private equity investments. Buyout funds typically own their holdings for about three to five years before selling them on. But investment horizons for the oil industry, where an exploration well can have a two-thirds chance of failure, tend to be much longer.

                  “One of the things that’s changed about private equity investors in oil is that they seem to be willing to hold things for longer – say for seven to eight years rather than two to three,” says Andy Brogan, head of global oil and gas transaction advisory services at EY. “Specialist PE investors seem to be more willing to take on exploration risk.”

                  As a result, PE-backed companies are often under less pressure to hit production milestones than their quoted counterparts. “We are patient,” says Mr Siddiqui. “We are not focused on quarterly metrics.”

                  At the same time, buyout groups also tend to target higher returns than with more conventional investments. “We’d like to think that over the next five years we can make three times our money,” says Graeme Sword, a partner in Blue Water Energy, which is also investing in Siccar Point. That compares with about two times the initial investment typical for plain leveraged buyouts.

                  What is clear is that the asset market for PE-backed companies has rarely looked so buoyant. The majors are expected to try to divest more than $300bn of oil and gas properties in the coming years – rich pickings for private equity.

                  “Look at the inventory of what’s for sale in the North Sea,” says First Reserve’s Will Honeybourne. “It’s massive.”

                  Draghi approaches his Abenomics moment

                  Posted on 31 August 2014 by

                  Matt Kenyon illustration©Matt Kenyon

                  Investors were not listening hard enough to Mario Draghi’s recent speech at Jackson Hole. If they were, they would have heard the sound of gears shifting.

                  At the annual gathering of central bankers last month, the president of the European Central Bank called for more “growth-friendly” fiscal policy across the eurozone and admitted markets had lost faith in his ability to revive inflation. It is conceivable that his speech marked the birth of Japanese-stye Abenomics in Europe. It has certainly pushed the ECB several steps down the road to US-style quantitative easing – large-scale purchases of government bonds.

                    QE is not the answer to Europe’s problems. It is probably not even a lasting solution to the problem of low inflation. In this, the “hawks” at the ECB who have resisted this step are right, and their more simplistic critics are wrong.

                    But, as Mr Draghi knows better than most, when it comes to the eurozone we left the world of ideal solutions a long time ago. The question is whether the ECB has reached the point where large-scale QE will do more good than harm, not just for the short-term strength of the economy but for its longer-term health as well.

                    I believe we have reached that stage, and that Mr Draghi’s remarks at the gathering in Wyoming reflect the same realisation. All that matters now is politics and timing. If the ECB does act, Mr Draghi does not want it to act alone. You might think I was reading too much into Mr Draghi’s comments. The financial markets, after all, were restrained in their applause. But the reality is that Europe’s politics and its economics look different now from the way they did even a few months ago – in ways that should matter to the ECB.

                    The best but probably least well understood reason the ECB had for not acting sooner was that a bout of very low inflation – in a reforming economy – is not necessarily the end of the world. The strong euro has played havoc with European company profit margins in the past year but it has also boosted household purchasing power at a critical time.

                    It is noteworthy that consumer confidence in much of Europe has been stable or rising for most of the past 12 months, despite all the talk of the eurozone’s economic woes. The fall in the price of everyday items such as food and energy might have something to do with this “surprising” outcome.

                    Of course, corporate profits and the productive side of the economy are hurt by a stronger currency – and low inflation makes it harder for countries on Europe’s periphery to become more competitive without cutting wages in cash terms. The longer it continues, the more dangerous it is. But in an economy that is still struggling there are downsides to higher inflation and a weaker currency as well, as Japanese households can attest.

                    Reforming politicians such as Italy’s Renzi, Italian prime minister, need growth – or the promise of it – to make difficult reforms

                    The story of Abenomics is far from over – but the typical Japanese household could be forgiven for thinking that all the Bank of Japan had achieved, in pushing down the currency and importing inflation, was another hit to household living standards. Japanese real wages have been falling for most of this year. With the fall in inflation, eurozone real wages have been going up.

                    The other argument for resisting QE was that it could not solve the structural problems of the eurozone economy. Central bank purchases of eurozone sovereign debt cannot revive Italian productivity growth after nearly two decades of decline. Nor can they reduce the regulatory burden on many French companies. Japan’s experience makes this point, too: monetary policy cannot raise an economy’s potential on its own. To put the recovery on a firmer footing, governments need to act as well.

                    It should not have escaped anyone’s notice that the points of light in the otherwise bleak GDP numbers for the eurozone were in the countries that have been forced to carry out the deepest structural reforms. Spain, Greece and Ireland all recorded fair to healthy growth in the second quarter. Output was stagnant in France and contracted, yet again, in Italy.

                    Mr Draghi’s insistence on the importance of structural reform in his Jackson Hole speech was hardly new. What was new was the explicit recognition that fiscal policy should be more flexible, and more supportive of growth, especially in countries with room for greater stimulus (Germany springs to mind).

                    The larger point is that reforming politicians such as Matteo Renzi, Italian prime minister, need growth – or the promise of it – to make difficult reforms. They also need to demonstrate that the rest of Europe, including the ECB, is doing its bit. To judge by the long-term inflation expectations embedded in market prices, market participants do not expect the ECB to do its bit on inflation for many years to come. Short-term expectations have fallen even more sharply.

                    That decline is not just down to the ECB; it reflects doubts about the strength of the recovery. But that is the other feature of the landscape that has changed since the start of the summer. The war in Ukraine is having a bigger effect on European confidence and activity than seemed likely only a few months ago.

                    Mr Draghi and his colleagues are right: the ECB cannot be the only game in town. They are also correct that there is no point in the ECB doing something, simply because “something must be done”. But Mr Draghi was quite explicit in Jackson Hole: the risks of doing too little in Europe are now greater than doing too much. Governments are doing too little. But so is the ECB.

                    The writer is
                    chief market strategist for Europe at JPMorgan Asset Management

                    Official data mask China’s bank problems

                    Posted on 31 August 2014 by

                    China’s official bad-loan ratio looks benign at 1.08 per cent, but few analysts believe that figure reflects the true magnitude of lenders’ asset-quality problems.

                    The share of non-performing loans in Chinese banks is almost certainly well below the officially acknowledged peak of 25 per cent reached in 1997, but estimates of the true ratio remain a topic of speculation.

                      The problem is that banks can employ a variety of methods to disguise their bad loans. The most common is simply to roll over debt. A bank that does not want to recognise a bad loan may offer a new loan to repay the maturing one.

                      “In situations where big borrowers are having problems repaying, the banks don’t want to make things worse by restricting liquidity, so they are finding ways to re-lend and extend,” says a senior bank adviser in China.

                      “Technically, it should not be do-able, but so much of the lending in recent years is considered political, so inspectors and regulators often allow leeway if they think the borrower is systemically important and could eventually get out of trouble.”

                      The International Monetary Fund says that a loan should be classified as non-performing if principal or interest are overdue for 90 days, or if overdue interest has been rolled over into a new loan.

                      Yet banks can skirt this requirement by leaving a gap of a few days between the old and the new loan. In such cases, a corporate borrower may access the high-interest informal lending market to raise cash to repay the maturing loan. After a few days, the bank issues a fresh loan that the borrower uses to repay the underground loan.

                      Annualised interest rates on informal loans can be 40 per cent or more, but the high rate is still manageable since many such loans are only for a few days.

                      Banks can also disguise bad loans by classifying them as “special mention”, a designation used for loans that are questionable but not yet non-performing. At Industrial and Commercial Bank of China, the country’s largest lender, Rmb231bn loans are classified as special mention, equal to 1.98 per cent of all loans and more than double the Rmb106bn labelled as non-performing.

                      Even if the official NPL figure understates the amount of bad loans, the trend is still indicative. The official NPL ratio is at its highest level since March 2011, and bank executives themselves say they expect it to keep climbing.