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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BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Archive | November, 2016

Record $475bn parked with Fed at year end

Posted on 31 December 2015 by

Pedestrians walk past the New York Federal Reserve building in New York, U.S., on Wednesday, Oct. 17, 2012. A Bangladeshi man was arrested for allegedly plotting to bomb the New York Federal Reserve in lower Manhattan as part of a sting operation by federal authorities who provided the suspect with fake explosives. Photographer: Scott Eells/Bloomberg©Bloomberg

New York Federal Reserve building

The Federal Reserve’s most important tool for setting interest rates absorbed a record $475bn of money from financial institutions in its last monetary operation of 2015, in another sign that one of the central bank’s main methods of draining liquidity from the financial system is working.

The New York Fed said that the US central bank had awarded $474.59bn in one-day fixed-rate reverse repurchase agreements to 109 counterparties in an auction on Thursday, more than a third higher than the previous record set at the end of the second quarter in 2014.

    The agreements allow qualified financial groups — including traditional banks and money market funds — to park cash at the Fed overnight in exchange for Treasury securities and 0.25 per cent interest.

    Analysts and economists have characterised the reverse repo facility, which controls the lower bound of the Fed’s target rate, as crucial to its ability to set short-term rates, and as among the central bank’s most potent tools.

    Earlier this month the Federal Reserve pulled off a historic move, lifting its benchmark rate for the first time in nearly a decade from a range between 0 and 25 basis points to 25-50 basis points.

    In its effort to ensure a smooth rate rise, the markets desk of the New York Fed said in December that it stood ready to offer $2tn of Treasury securities on its balance sheet as collateral for the overnight operations, removing a $300bn daily cap.

    Ward McCarthy, an economist with Jefferies, said that he had been concerned before the lift-off about the Fed’s ability to control its target rate.

    “This concern was related to the lack of concrete detail about the post-lift-off structure of the [reverse repo programme] and the possibility that it would not be able to absorb a sufficient amount of reserves to keep the fed funds rate above the lower bound of the target range,” he said.

    “With two weeks having passed since the lift-off announcement, it does not appear that the Fed is having any trouble keeping the effective fed funds rate between 25 and 50 basis points.”

    The $475bn awarded on Thursday matures on January 4, when markets reopen following the new year holiday, and compares to $277bn taken at an auction on Wednesday.

    Banks tend to participate in the reverse repo programmes to improve the snapshot of their balance sheets at quarter- and year-end, ahead of stress tests undertaken by financial regulators.

    The overnight reverse repo facility works in concert with the Fed’s interest on excess reserves programme, in which the central bank pays interest on cash banks park in its coffers.

    However, since the interest on excess reserves programme is limited to approved banks, not all lenders in the federal funds market have access to the 0.5 per cent rate — the current ceiling of the Fed’s target range.

    Money piled too deep in too few places

    Posted on 31 December 2015 by

    SolarCity Corp. employees install solar panels on the roof of a home in Kendall Park, New Jersey, U.S., on Tuesday, July 28, 2015. SolarCity Corp. is scheduled to release earnings figures on July 29. Photographer: Michael Nagle/Bloomberg©Bloomberg

    For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.

    Matthew 25:29, New Testament,
    English Standard Version

      Not to apply what was supposed to be spiritual guidance to current trends in the investment world, but it does seem that money is being piled too deep in too few places. Over the past year there has been much more talk of contrarian thinking than of actual contrarian position taking.

      And it has become even more difficult than usual to raise money unless your institution already has more than it can sensibly deploy.

      For the most part, the fiduciaries or real-money clients want easy-to-understand, sustained trends that will work from one calendar year and annual conference to the next. In other words, they would like to own a reliable perpetual motion machine, which cannot exist.

      That is why success in accumulating assets under management would appear to have more to do with adroit showbiz and good marketing than with the consistency of one’s analytic approach.

      Still, there was some value to be added by good methodology. I have tried to see what worked in my own published opinions, which, fortunately do not have to be passed through a compliance officer or investment committee.

      One surprise to me is how often you could have avoided losses, or even made some money, by being informed in detail
      about the political environment and legal framework of investible securities. Anyone should be able to understand the documents I study. But most people do not take the trouble to read beyond the frequently misleading executive summaries.

      Take one example of a vehicle for speculation: Greek government bonds. There was a common belief at the beginning of last year that the election of a Syriza-led government would have no consequences for Greek government bond prices.

      Yet if you had read what the Syriza coalition had promised its constituencies, you would have seen that it was publicly committed to flying the country’s external finances into a ground loop.

      Which it did. Then the Syriza-istas imposed the capital controls I had been told were an impossibility. Then the coalition had to call new elections, and subsequently give in to the euro-cracy, despite their new election promises, because their own voters would otherwise not get pensions or state-paid salaries. You could have ridden the Greek government bond prices up and down and up again at each predictable turn.

      If the European investors were willing to deceive themselves about Greece, their US counterparts were equally obtuse about what had to happen in Puerto Rico. When the governor of Puerto Rico used a newspaper interview in late June to inform the world that the commonwealth’s debt was “unpayable”, you would have thought he had revealed a shocking state secret.

      While it is effectively impossible to directly short sell Puerto Rico’s $70bn of bonded debt, it would have been quite possible to dump the shares of municipal bond insurance companies who guaranteed some commonwealth

      Last year, the price of the Municipal Bond Insurance Association’s shares plunged by about a third, as the company’s management and their lawyers kicked, screamed and, finally, started to acquiesce in what will be a federally led bailout (in all but name) of the island’s government.

      The best bang for your political contribution buck, though, would have come from knowing the inside story of the negotiations between the Washington Republicans and Democrats over the tax treatment of renewable energy projects. SolarCity, the child of Elon Musk, the celebrity green entrepreneur, was one of the best ways to play the climate investing game.

      At the end of December 2014, SolarCity shares were at $52.92, amid much complacency about the indefinite extension of renewables’ favourable treatment by the taxation and electricity rate authorities. Over the course of the next eleven months, as the hostility of the Congressional Republicans and the scepticism of the state regulators became more evident, the shares drooped to a low of $25.85 in mid-November.

      Right at that point, without a Washington insider on retainer, you could have missed your chance to cash in on the deals made

      between pro-renewables Democrats and Republican climate sceptics. From mid-November to the end of December, SolarCity’s shares approximately doubled, to a touch over $50 a share. You can see the value of what some might call inside information and others just good research.

      The dead cat bounce at the beginning of last year in oil prices and the shares and bonds of energy companies and countries was also a good opportunity to go against the sellside recommendations.

      Yes, it can be proved by analysts that oil and natural gas prices are below their replacement cost. But who says producers are not allowed to go broke? Prices of commodities never hit their lows before inventories are liquidated, and that is only just beginning to happen with the energy complex.

      You are not required to lose money just because your peers are losing. Just be a bit sceptical, not cynical.

      Crude rebound fails to lift energy stocks

      Posted on 31 December 2015 by


      A rebound in crude prices failed to offer relief to energy stocks on Thursday, as Europe’s equities indices were muted in thin volume ahead of the early end of the last trading day of 2016.

      Oil’s steep slide has overshadowed markets, stoking concern not just about its immediate implications for stocks in the sector, but also on the outlook for inflation in developed markets. Brent crude, the international marker, rose 0.7 per cent to $36.73, with Nymex West Texas Intermediate up 0.4 per cent at $36.7.

        But oil majors found little cheer, with Brent’s tumble over 2015 at more than 37 per cent. Shares in Royal Dutch Shell fell 0.8 per cent on Thursday. BP was down 0.3 per cent, as was France’s Total.

        The FTSE 100 in London slipped 0.2 per cent, to take its decline for the calendar year to 4.7 per cent. The CAC 40 in Paris was down 0.4 per cent, trimming its wider gain for 2016 to 9.4 per cent. Frankfurt’s Xetra Dax 30 remained closed for the new year’s eve public holiday, leaving it up 9.6 per cent since January.

        The Europe-wide Euro Stoxx 600 was down 0.2 per cent.

        On currencies markets, the dollar was holding its ground, with the euro down 0.1 per cent at $1.0922 and the pound up 0.1 per cent to $1.4826.

        The tone of the final session of the year was steady in Asia, where China’s main indices were mixed.

        The Shanghai Composite fell 0.9 per cent, trimming its gain for 2015 to 9.4 per cent after a year of volatility marked by a sharp slide in August and then a steady recovery from lows. Hong Kong’s Hang Seng ticked up 0.2 per cent, leaving it down 7 per cent since January.

        The rouble continued to fall on deepening concern about the consequences of low oil prices on Russia’s oil-dependent economy. The currency weakened by a further 0.7 per cent on Thursday, with Rbs73.7445 required to buy a single dollar, its weakest level on record apart from a brief rout last December that threatened a run on the Russian banking system.

        Osborne facing pressure after UK bank review ditched

        Posted on 31 December 2015 by

        Bank signs on the high street in Staines. Barclays, HSBC, Lloyds, Natwest.©Charlie Bibby

        George Osborne is coming under pressure to revive a key review of banking culture after it emerged the UK’s financial watchdog had dropped its examination, in a sign that the “assault” on banks is waning.

        The Financial Conduct Authority has ditched its probe into the culture of retail and wholesale banks operating in the UK only months after it launched, based on the view each business is unique and therefore cannot easily be compared, the Financial Times revealed yesterday.

          The move to stop the review, which was originally unveiled by the watchdog early in 2015, bows to the threat that HSBC could relocate its headquarters overseas, some investors claim.

          But politicians are calling for the chancellor to exert his power to resurrect the banking culture probe.

          John McDonnell, Labour’s shadow chancellor, said the decision by the FCA “will be a huge blow” to customers and taxpayers who are “still paying the price for the failed culture in the banking sector” in causing a string of scandals and spurring the financial crisis.

          He said: “The Chancellor therefore cannot stay silent on this issue. It’s time he used his influence to keep this review going.

          “Otherwise he’s letting down the rest of us who bailed the banks out and also allowing a signal to be sent to carry on regardless.”

          He added that scrapping the review “sends the wrong message at the wrong time,” and said he is concerned that the watchdog’s decision to instead engage with banks individually is a “potentially watered down version”.

          Conservative MP Mark Garnier described the FCA’s decision as “disappointing”.

          “I agree every single bank has a different way of remunerating staff, but the problem is that it’s useful when you have an across-the-piece review to see what appears to be best practice,” he said.

          Bank culture has come under the spotlight since the financial crisis, for giving rise to foreign exchange and Libor rate-rigging scandals that have led to multibillion pound fines.

          Consumers have also lost out to widespread misconduct by banks. The mis-selling of payment protection insurance alone has forced the banks to set aside more than £26bn.

          Richard Lloyds, chief director of consumer group Which? warned that the FCA “must not take their eye of the ball” and that it should continue to “clean up the industry”.

          Investors believe the FCA’s move to ditch the assessment is the latest sign that “banker bashing” is coming to an end and reflects a thawing of government relations with lenders.

          Richard Buxton, chief executive of fund group Old Mutual Global Investors, said: “The mood music towards banks is becoming more positive. 2015 was also the year we turned a corner on clarity over regulatory demands on bank capital levels.”

          Percival Stanion, a fund manager at Pictet Asset Management, said it is “not a surprise” the regulator is backing off from the “assault on the banking sector”.

          “Clearly the industry has been doing a lot of lobbying to get the temperature turned down,” he said. “The consideration by HSBC of where its headquarters will be located must be a factor that has been an influence.”

          HSBC is undergoing a review of its domicile location, which is expected to complete early next year, with the US and Hong Kong as potential alternative bases to the UK. The bank has come under pressure from the UK’s bank levy, which Mr Osborne opted to scale back in his 2015 summer budget.

          Mr Stanion said it would be “a major loss to London” if HSBC were to move overseas. “The departure of such a large institution with such a long association with Britain would be a blow, and would have employment and tax revenue implications,” he added.

          Reinsurers hit by falling renewal prices

          Posted on 31 December 2015 by

          Submerged buildings overlooking the river Ouse are pictured late in the afternoon in York, northern England, on December 29, 2015. Residents in the northern city of York continued to deal with the effects of flooding and make preparations for the arrival of another winter storm that is set to bring more heavy rain. Around 500 properties were flooded in York on December 27, as two rivers, the Ouse and the Foss, burst their banks. AFP PHOTO / JUSTIN TALLIS / AFP / JUSTIN TALLIS (Photo credit should read JUSTIN TALLIS/AFP/Getty Images)©Getty

          The River Ouse in York, north east England, burst its banks

          Reinsurers are facing further pressure after the December contract renewal season delivered another year of falling prices — the fourth in succession.

          Prices for property catastrophe reinsurance in the UK fell by between 10 per cent and 15 per cent. In continental Europe prices fell by between 5 per cent and 12.5 per cent on a like-for-like basis, according to broker Willis, while in the US prices were down by between 2.5 per cent and 7.5 per cent. Just over half of the reinsurance market renews in December, with the rest in April, June and July.

            “There was some hope in the middle of the year that pricing reductions would begin to ease but those hopes have largely been dashed and rates have continued to fall,” said James Vickers, chairman of Willis Re International.

            The price declines are partly driven by the primary insurers that buy reinsurance, who are facing falling rates themselves. “Primary insurers have been asking reinsurers to help them by reducing costs and widening the coverage,” said Mr Vickers. 

            Other factors pushing rates down include an influx of capital into the sector from sources such as insurance-linked securities, and an absence of large property catastrophe losses. According to preliminary data from Swiss Re, there were $32bn of insured catastrophe losses in 2015, down 11 per cent on 2014 and about half the level of the $62bn 10-year average. 

            The floods affecting large parts of the UK are not thought to be widespread enough to have a significant affect on reinsurance pricing. 

            The falling prices, combined with low investment returns, are taking their toll on reinsurers’ profitability. According to an index compiled by Willis, underlying returns on equity (excluding the effect of reserve releases) in the reinsurance industry fell from 7.8 per cent in the first half of 2014 to 5.1 per cent in the first half of 2015. Many of the quoted reinsurers target ROEs in the low to mid teens. 

            Changes in the insurance-linked security market could help to keep returns low. While initial investors in ILS targeted double-digit returns, newcomers such as pension funds are not so demanding. “It is long-term money,” said Mr Vickers, “they want stable long-term returns but they are not dissuaded by a 5 per cent return.” 

            In recent years, reinsurers’ reported profits have been bolstered by reserve releases from previous years. That trend is expected to continue in the results for 2015, allowing the reinsurers to report decent results despite the falling prices. 

            “The pips are squeaking but they are not yet prepared to walk away from things,” said Mr Vickers. “Some reinsurers have got to start reporting very bad results for the game to begin to stop.”

            Italy struggles to keep business stars

            Posted on 31 December 2015 by

            Mario Greco©Bloomberg

            Mario Greco

            When Mario Greco took up the job of chief executive of Generali three years ago his decision to move from Zurich Insurance Group to Italy was applauded as a sign of renewal in the country’s clubby corporate culture. It is therefore of relevance not just to Generali — where the share price has almost doubled during his tenure — but as a barometer of change in corporate Italy that Mr Greco may not stick around.

            According to several people inside and outside Generali with direct knowledge of the events, Mr Greco has not yet renewed his contract for a second term at the Italian insurer. Generali’s board were slow to agree new terms and in the meantime he has emerged as a top candidate to take up the job of chief executive at Zurich Insurance after the exit of Martin Senn. Insiders say the game will be played out in the next five or six weeks.

              The brinkmanship can be seen as part of the rough and tumble of renegotiating a C-suite pay package. Since discovering Mr Greco could head to Zurich, Generali’s board has drawn up a more lucrative contract for Mr Greco to persuade him to stay, say people with direct knowledge of the negotiations. Playing hard to get for Naples-born Mr Greco may pay handsomely.

              Shifting to Zurich may also be attractive because his impressive turnround of Generali has started to run out of steam, at least as measured in share performance. Back in 2012, Generali needed capital. So Mr Greco sold nearly €4bn of assets, and slashed costs to improve profits, and the ability to build capital organically. The stock price duly leapt. But in the past year, Generali’s share price has become range bound as Mr Greco embarked on the trickier task of operational fine-tuning in a zero interest rate environment.

              If Mr Greco leaves, it may turn out to be latest sign of the difficulties Italy’s top expatriate talents find when they return home. Italy has made progress in corporate governance. But it is still alarmingly common for weak executives who do not rock the boat to remain in their jobs for years, to the detriment of the entire corporate culture.

              The most flagrant example was Giuseppe Mussari, discredited chairman of Banca Monte dei Paschi di Siena who was close to politicians and the Catholic Church. He presided over the spectacular decline of the 500-year-old bank during a decade of corruption and ineptitude by top management. On the day he quit, Mr Mussari, who was twice nominated head of Italy’s national banking lobby, said that as a trained lawyer he had never understood the complexities of finance.

              By contrast in his three years at Generali, Mr Greco has gained a reputation as an outlier: tough, uncompromising and prickly. He has slashed the insurer’s shareholdings, cracked down on related-party transactions and appointed foreigners — by definition outsiders to the Italian system — to key roles. Generali’s chief investment officer who looks after its €500bn in assets is English-speaking, India-born, Harvard and Cambridge-educated Nikhil Srinivasan.

              The Monday Interview

              Mario Greco, a change of gear in Italy

              Mario Greco

              From September 6 2015: In an interview in September Generali chief executive Mario Greco presents himself as a straight-talking numbers man, in a deliberate distinction from the avuncular manner of Italy’s older executives.

              Mr Greco was brought in by Generali’s board as an antidote to the insurer’s previous chairman and chief executive. Cesare Geronzi was a veteran Italian powerbroker close to former prime minister Silvio Berlusconi, and Giovanni Perissinotto, who employed his own father. The pair were ousted in swift succession after the shares lost two-thirds of their value. Even so, Mr Greco’s independent management style has irritated some in Milan’s corridors of power. While Alberto Nagel, chief executive of Mediobanca, the Milanese investment bank that owns 13.5 per cent of Generali shares has publicly expressed his confidence in Mr Greco, others are not so keen, insiders say.

              Crucially, the tension is a two-way street. Mr Greco has not hidden his frustration with being back in his home country. In a recent interview with the Financial Times, he bristled about Generali’s euro-denominated balance sheet and the overhang on his debt rating from the sovereign. At one illuminating point, he railed: “The fact that we are strong in Italy, is this a sin?” and did not sound entirely convinced that it wasn’t.

              Mr Greco is in good company in his frustration. Vittorio Colao, did a troubled two-year stint back in Italy as chief executive of RCS Mediagroup, another company at the tangled heart of Italy’s culture of cross shareholdings. There he rubbed up against vested interests before beating a retreat and returning to Vodafone where he swiftly became CEO.

              Italy-born Sergio Marchionne, CEO of Fiat Chrysler, has barely disguised his disdain for the clubby world of Italian capitalism and he sped off to Detroit as fast as he could. Italian insiders often noted that Mr Marchionne never owned a home in the country but immediately bought one in the US. Mr Greco has apparently never given up his home in Zurich.


              How landed gentry could aid housing crisis

              Posted on 31 December 2015 by

              ACXDKA Upkeep of the estate roads at Cambo.©BCS/Alamy

              Cambo estate in north-east Fife

              A Devon estate dating back to 1299 has devoted a corner of its land to new affordable housing in a move that surveyors say could become a model for the aristocracy helping to solve the housing crisis.

              Clinton Devon Estates, headed by the 22nd Baron Clinton, worked with a housing association to build 19 homes in the seaside village of Budleigh Salterton on part of the estate’s 25,000 acres of land in southern England.

                More “modern day Lord Downtons” from among the landed gentry should follow suit, building for local residents as their predecessors constructed workers’ cottages, said the Royal Institution of Chartered Surveyors, a professional body.

                In the popular TV period drama Downton Abbey, set in the early 20th century, some of the worker characters live in cottages surrounding the patriarch’s manor.

                “We are calling for large country estate owners to look back to the past and adopt a more paternalistic approach to their local communities,” RICS said.

                More than a third of the UK’s land is still owned by aristocrats and the landed gentry, according to a 2010 survey for Country Life magazine.

                Leigh Rix, head of property and land at Clinton Devon Estates, said the homes completed this year — made up of affordable rented, social rented and shared-ownership houses built with Cornerstone, a housing association — form part of a 48-home development on estate land. The rest will be sold commercially, enabling the project to be cost-effective.

                We are calling for large country estate owners to look back to the past and adopt a more paternalistic approach to their local communities

                – Royal Institution of Chartered Sureyors

                The affordable homes were a response to local housing need but were not a planning obligation, he said.

                “We rely on local people to work on our farms, on the tenanted farms and on our heathlands,” said Mr Rix. “We need local people, as local people need housing.”

                Of the estate’s 50 staff, at least 20 are housed in its buildings, which range from centuries-old thatched cottages to the newly built homes whose designs have been given ancestral Clinton family names such as Trefusis and Rolle.

                England’s new housing shortfall has been estimated at more than 300,000 homes a year, with factors from planning hurdles to escalating construction costs contributing to the shortage.

                Average house prices amount to more than 11 times annual wages in some parts of the countryside, RICS said.

                “We would like to see local authorities work sympathetically with estate owners to encourage the release of land for eight or more affordable houses, based on long leaseholds, which would allow estates to retain long-term interests,” said Jeremy Blackburn, head of policy at RICS.

                He said that estate owners at the start of the 20th century took a “more patriarchal approach” to providing affordable housing, partly for “philanthropic” reasons but partly to ensure a settled workforce.

                RICS is calling for measures to encourage landowners to release plots of land, such as partial inheritance tax exemptions that would allow heirs to avoid paying taxes on affordable properties on their estates.

                Mr Rix said Clinton Devon Estates hopes to build another 10 affordable homes on a separate site.

                “It’s a very small amount of farmland that we lose in comparison with the number of people that we’re helping. There’s always an opportunity cost, but we want to build sustainable communities,” he said.

                Scottish model tackles ‘more chiefs than Indians’ problem


                Sir Peter Erskine, a Scottish baronet, built 10 homes for affordable rent as part of a 22-home development — complete with village green — on his Cambo estate in north-east Fife.

                The project was backed by £677,000 in grants from the Scottish government’s now-defunct Rural Homes for Rent scheme, set up in 2008 as a pilot project aimed at large landowners. It built some 53 homes and will be replaced from next year with a broader Rural Housing Fund.

                Sir Peter said his 800-year-old estate wanted to help foster a young population of local families and prevent communities from being taken over by retirement and holiday homes.

                “In this part of the world, so many of the houses get sold as second homes, and you end up with all chiefs and no Indians,” he said.

                The estate also owns 26 cottages, some of whose inhabitants work for its businesses, which include a hotel, golf course and distillery.

                Even with government support, it took six years to complete the new project in the face of hurdles including the financial crisis and well-organised local opposition to new development.

                The government assistance was crucial, said Sir Peter. “Without that, the numbers just don’t stack up.”

                The Scottish government is introducing land reforms that could provide for forced sales of some land to local communities, bringing the broader role of estates into the spotlight.

                Sir Peter said new housing was “essential” and landed estates should play their part.

                “You can see from Downton Abbey how these estates were economic, social, cultural and training hubs in the local community,” he said.

                Rouble hit amid fears for Russia economy

                Posted on 30 December 2015 by

                The rouble fell to its lowest level in more than a year on Wednesday as Russians faced the prospect of a second successive year of recession in 2016 amid continued oil price weakness.

                The Russian economy is expected to contract 3.7 per cent this year, hit by falling oil prices and western sanctions, but officials had previously suggested the situation was stabilising with President Vladimir Putin saying the “peak of the crisis” had passed.

                  But the drop in the oil price has tempered those expectations and senior figures in the Russian political and business elite warned this week that the country should brace itself for further weakness next year.

                  On Wednesday, benchmark Brent crude oil fell more than 3 per cent to $36.64 a barrel as Saudi Arabia reiterated it would not cut production in response to lower oil prices after announcing a radical austerity programme earlier this week.

                  That helped to trigger a slide in the rouble to more than 73 to the dollar — its weakest level on record apart from a brief rout last December that threatened a run on the Russian banking system. By early evening in Moscow, the rouble was trading 1.2 per cent weaker, at Rbs73.1570 to the dollar, down 26 per cent since the start of the year.

                  “2016 will not be easier than 2015, and it could be more challenging,” Alisher Usmanov, one of the country’s wealthiest oligarchs, said in an interview broadcast on state television this week.

                  Alexei Ulyukayev, economy minister, said that Russia should prepare for oil prices to remain low “for years”.

                  Russian government data showed that the economy contracted month-on-month in November for the first time in five months.

                  “It all depends on oil, oil, and again on oil,” says Oleg Kouzmin, economist at Renaissance Capital in Moscow. “This current crisis has no concrete bottom.”

                  The recent weakness in the economy is hitting ordinary Russians particularly hard, analysts say. Government data published this week showed that real wages were down 9.2 per cent year-on-year in the first eleven months of 2015. That marks the first such fall since the economic turmoil of the late 1990s.

                  Chart: Russian rouble against the dollar

                  Sales of consumer goods — from food to cars — have fallen sharply, with retail sales down 13.1 per cent year-on-year in November. And according to state-owned pollster VTsIOM, 39 per cent of Russian households cannot afford to buy either sufficient food or clothing — up from 22 per cent a year ago.

                  Mr Putin struck a downbeat note on the economy at his annual marathon press conference earlier this month, warning of the prospect of a rise in the retirement age — although he repeated his insistence that the peak of the crisis had passed.

                  “Now it’s about managing expectations, particularly coming into 2016,” said Chris Weafer, a partner at Moscow-based consultancy Macro-Advisory, pointing to parliamentary elections due to be held next September. “The last thing you want to do is be talking about Russia being in recovery as people are becoming even more fearful about their income and their job security.”

                  It all depends on oil, oil, and again on oil

                  – Oleg Kouzmin, Renaissance Capital

                  The main reason for the change in tone on the economy is the further decline in oil prices, which in mid-November resumed their slide, touching 11-year lows earlier this month. Oil and gas account for half of Russian government revenues and the price of oil has a sizeable influence on confidence among businesses and consumers.

                  While the economy ministry is still forecasting a return to slight growth for the Russian economy in 2016, few share its optimism. The World Bank earlier this month trimmed its forecast to a 0.7 per cent contraction. The Russian central bank envisages a 0.5-1 per cent contraction should oil prices recover to an average of $50 next year, but a 2-3 per cent recession under a “stress scenario” of $35.

                  Chart: Russia retail sales

                  Russian officials have been warning the population to brace for the worst. Both Alexander Novak, the energy minister, and Alexei Ulyukayev, economy minister, have appeared on state television in recent days warning of a protracted period of low oil prices. Mr Novak blamed low prices on an increase in production from Saudi Arabia, which he said had “destabilised the situation on the market”.

                  “We cannot say the peak of our problems has passed,” said Aleksei Kudrin, a respected former finance minister, in an interview with Interfax. “Some time ago, many experts, myself included, believed that we had reached the bottom, or as they say, had passed the peak of the crisis. But today we see some further deterioration.”

                  While Mr Putin still enjoys sky-high popularity ratings of more than 80 per cent, the decline in ordinary Russians’ economic situation is a source of concern for the Kremlin, analysts say.

                  A protest by truck drivers from several Russian regions over a new electronic toll system has flared up in the past two months, in a rare sign of open discontent. A poll published on Wednesday by Levada Centre, a leading Russian pollster, found that 63 per cent of Russians supported the truckers’ position.

                  Mr Kudrin, who advises Mr Putin on economic matters and has long been rumoured to be due to return to government, warned that 2016 “will bring a serious challenge” for the country. He said that in some parts of Russia consumer demand was down 30 per cent ahead of the new year holidays.

                  Mr Ulyukayev, the economy minister, said of the fall in consumer spending: “We haven’t seen anything like this since 1999. Many of those who are working today simply haven’t experienced anything like this.”

                  Mr Weafer argued that the Kremlin’s response to the shooting down of a Russian jet by Turkey in November — restricting Russian tourism there and banning the import of a range of Turkish products — had combined with falling oil prices to deal a hefty blow to consumer sentiment.

                  “There was this general confidence that this would be a one-year recession,” he said. “Turkey and oil prices have led people to reassess the reality of the situation, and they found there was much less reason for optimism than they had previously assumed.”

                  Some of the Russian government’s recent actions have not helped its domestic economy. The embargo on the import of a range of Turkish and Ukrainian products is likely to contribute to higher inflation in the next few months. And the EU recently extended sanctions against Russia over its actions in Ukraine, saying it had failed to implement obligations under the Minsk ceasefire agreement.

                  “Geopolitical priorities are making the situation worse,” Mr Weafer said. “The key point for 2016 is: will the concern about deteriorating economy start to have a moderating impact on foreign policy or not?”

                  Puerto Rico to miss new year payments

                  Posted on 30 December 2015 by

                  Flag of Puerto Rico at Capitolio, San Juan ID 41750618 © Wangkun Jia | Flag of the Commonwealth of Puerto Rico in front of Capitolio, San Juan, Puerto Rico.©Wangkun Jia/Dreamstime

                  Puerto Rico will default on a number of its obligations at the start of the new year, as the impoverished US territory — beset by nearly a decade of recession — runs out of cash.

                  The island, struggling under a debt burden of $72bn, will be unable to pay the entirety of roughly $1bn in claims due on January 1, Governor Alejandro García Padilla conceded on Wednesday.

                    The US territory scrambled to pay $328.7m owed on the island’s general obligation debt, municipal bonds that are backed by the commonwealth’s constitution and among its highest priority debt.

                    Puerto Rico was forced to claw back more than half of that amount from other government organisations, the governor said.

                    Two bond insurers — Ambac Assurance and Financial Guaranty Insurance Company — have already lambasted the moves, which have affected funds set aside for the Puerto Rico Infrastructure Financing Authority.

                    The island also paid $15.4m due on debt issued by the Puerto Rico Sales Tax Financing Corporation, known as Cofina debt by its Spanish acronym, and $9.9m owed by the Government Development Bank, the commonwealth’s de facto finance authority.

                    The governor said the island would instead miss payments on $35.9m on debt issued by the Infrastructure Financing Authority as well as $1.4m on Public Finance Corporation bonds, which first defaulted in August.

                    Melba Acosta Febo, president of the GDB, said that the island had chosen to default on obligations where bond documents stated revenues assigned to the organisations were able to be clawed back.

                    Governor García Padilla issued an order in December that allowed Puerto Rico to shift revenues and funds set aside for some issuers — organisations that do not enjoy certain legal guarantees — to pay bond holders of higher priority debt, including those backed by the constitution.

                    Investors in Cofina and general obligation debt have contended that they are both at the top of the complicated capital structure, and should be paid over the other when the island completely exhausts its reserves.

                    A December study from the Center for a New Economy, a non-partisan research group on the island, put the general obligation bonds at the top of the complex pyramid, followed by issuers who have backing from the good faith and credit of the government. The group ranked the Cofina debt third.

                    Lawyers and analysts have disputed the exact ranking and have warned that lawsuits are likely to begin once a payment on the bonds is missed.

                    Credit analysts with both Moody’s and Standard & Poor’s have said that the dearth of liquidity implies it is only a matter of time before the commonwealth begins defaulting on its higher priority debts.

                    US Treasury secretary Jack Lew said that it was “inevitable” for the commonwealth to default in the coming months, and that they were “effectively in default” after they began shifting money from some issuers to pay bills from others.

                    Puerto Rico has attempted to stave off default on those obligations in a bid to avoid costly litigation that could undermine its restructuring work. Roughly 70 per cent of bondholders have already agreed to a restructure of debt issued by the island’s electric utility, taking a 15 per cent haircut.

                    Prepa, as the utility is known, will make its $303m payment due at the year’s start.

                    Questions have swirled over the hierarchy of the bonds — Puerto Rico has more than a dozen issuing authorities and investors have already clashed over who has first right to cash the island has claim over.

                    Mr García Padilla has emphasised that he will prioritise essential public services over bondholder payments.

                    Puerto Rico has paid roughly $200m to the trustee that handles Cofina debt, Ms Acosta Febo said, indicating that a February payment will be made on time.

                    Investors now turn their attention to a May 1 payment owed by the GDB, which the government has yet to set aside or claw back funds for. The island faces a maturity wall of at least $1.9bn in July, according to the Centre for a New Economy, a payment analysts, investors and policymakers in Puerto Rico have agreed it will be unable to make.

                    Nasdaq sells shares using blockchain

                    Posted on 30 December 2015 by

                    A man works at the NASDAQ exchange in New York City©Getty

                    Nasdaq claims to have broken new ground on use of blockchain with a share sale on Wednesday that used a system based on the technology.

                    The blockchain is the shared database technology that initially gained notoriety as the platform for bitcoin and other crypto currencies. But many large financial groups are now seeking to use its technology to make payment systems and capital market transactions faster and cheaper.

                      It works as an electronic ledger of digital events that uses cryptography to continuously verify “blocks” of records and then distribute them among parties to the transactions.

                      The enthusiasm around blockchain on Wall Street has been so intense that Nasdaq’s announcement prompted a scuffle over who owns the bragging rights to the first share sale using blockchain.

                      Nasdaq said, a privately owned company that itself specialises in blockchain technology, had issued shares to a private investor using the US exchange’s new Linq system that is based on the digital ledger technology.

                      The exchange group said the transaction had created a digital record of share ownership — “significantly reducing settlement time and eliminating the need for paper stock certificates”. It also allowed the issuer and investor to complete and execute share subscription documents online.

                      Bob Greifeld, chief executive of Nasdaq, said: “We believe this successful transaction marks a major advance in the global financial sector and represents a seminal moment in the application of blockchain technology.”

                      But Symbiont, a start-up backed by trading veterans including Duncan Niederauer, the previous chief executive of the rival New York Stock Exchange, hit back, claiming it issued the first securities using blockchain technology in August.

                      Symbiont issued its own shares using the bitcoin blockchain while a privately held company used Nasdaq’s proprietary blockchain network to sell shares to a private investor.

                      Nasdaq said the blockchain technology could significantly speed up the clearing and settlement of equity trades from the existing standard of three days in the US and two days in Europe to as little as 10 minutes.

                      Supporters of blockchain technology argue that near-instantaneous settlement of transactions can transform the financial system by automating the clunky back offices of banks. This could also free up billions of dollars that banks and others must hold as collateral to insure against things going wrong while a trade is being settled.

                      However, despite a plethora of industry consortiums, no widely-used financial product has yet been switched to blockchain technology.

                      Mr Greifeld said: “Through this initial application of blockchain technology, we begin a process that could revolutionise the core of capital markets infrastructure systems. The implications for settlement and outdated administrative functions are profound.”

                      The technology could cut banks’ infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15bn-$20bn a year from 2022, according to a recent report by Spanish bank Santander, management consultancy Oliver Wyman and venture capital investor Anthemis.

                      Other groups are also turning their attention to bitcoin and its technology. The NYSE this year launched the first exchange-calculated and distributed bitcoin index. In January, NYSE made a minority investment in Coinbase, a bitcoin wallet and platform.

                      Blythe Masters, the former JPMorgan banker who helped develop the idea behind credit default swaps, has joined a group of trading executives setting up a venue that will convert buyers and sellers of financial assets into bitcoins, thus cutting settlement times.