Andrew B. Busch
Global Currency & Public Policy Strategist
BMO Capital Markets
On October 26th, the members of the Euro Zone agreed to three major structures to reduce credit stress within the union. First, there was an agreement to increase the losses to private sector Greek bondholders from 21% to 50%. Second, there was an agreement on the need for bank recapitalizations of 108 billion EUR. Third, there was agreement to expand the size of the bailout facility to enhance its ability to cover larger nations. All are important and all are related. Let’s review the structures to gauge if they will be successful and to gauge what additional measures need to be taken to contain the crisis.
Greece was the initial infection for the European debt crisis and therefore resolving this country’s issues were seen as critical for containing the problem. Clearly, this was a nation that needed a severe restructuring of not only its fiscal spending, but also its economy. With one out of five workers employed by the government, the public-private balance was out of balance and encouraged the electorate to vote for legislation favorable to government spending. With the economy contracting 7.4% in 2010 and expected to contract 5.5% in 2011, the country’s tax receipts continue to shrink and their ability to service their debt has decreased significantly. Greece has a debt-to-GDP level of 145% and their tax revenues can support less than a third of that load. In July, Euro zone members agreed to a 109 billion EUR loan to Greece as well as a voluntary (to avoid triggering CDS) private sector 21% cut to face value of Greek bonds.
Clearly, this reduction in debt load was not enough to set Greece on a sustainable fiscal path. At that time, the markets were pricing Greek bonds at only a 30-40 of face value and reflected what they believed was sustainable. In October, the Euro zone nations acted again to reduce the 21% haircut to 50% for private sector bondholders. While this is closer to a level they can support, the problem is that cut is only for the private sector holders and it will only reduce the debt-to-GDP levels to 120% by 2020. Greece needs to have this level reduced to 60% for a true sustainable debt load. Therefore in the medium term, the Greek issue will not be resolved by further austerity measures or by a new Greek government. It must restructure its debt with losses for all bond holders, both private and public including the ECB.
With this in mind, the progression of the European debt crisis has been that the contagion moved from the periphery countries into the core countries into banking system. It’s this third stage of infection that has expanded the crisis into an acute stage which had to be addressed expeditiously. Sadly, the debt crisis has been dragging on since November of 2009 and through 13 meetings of European leaders to no resolution. This has exacerbated the downward spiral of confidence leading to US money market funds not extending credit to European banks and creating a potential funding crisis. It didn’t help when the EBA (European Banking Authority) did a stress test recently that gave Dexia a passing grade only to see the bank collapse and have to be broken up. The IMF has calculated that European banks need to raise E200 billion to plug a hole in bank balance sheets created by sovereign debt write-downs with other estimates as high as E275 billion. Unfortunately, the October Euro zone agreement was underwhelming in that it asked Europe’s big banks to find only 108billion EUR infresh capital by June 2012 to strengthen the banking system. The EBA ran new stress tests and this higher level of capital would make lenders to reach a 9% threshold for their tier one capital ratios. Europe missed their opportunity to shore up their banking system quickly and take a major step towards providing certainty to investors over the entire banking system.
One of the unintended consequences of simultaneously putting the Greek bond haircuts on the private sector and asking banks to recapitalize is forcing owners of all sovereign European debt to sell. With only the private sector bondholders taking the Greek haircut and the haircut not reducing the debt-to-GDP down enough, the perception is that more will be needed and it will fall on the private sector. This encourages bondholders to sell now or take more losses. Also, this structure may be used on other nations like Ireland, Portugal, Spain or Italy and further encourages selling of those nations’ debt. Finally, banks can raise their tier one capital ratios by either issuing more stock or by reducing the assets on their balance sheets. With stock prices already extremely low, issuing stock is not only dilutive, but won’t raise capital very efficiently and therefore will not likely be done. However, banks will be incented to reduce their balance sheets by selling assets like sovereign debt and by reducing their lending. Both of these outcomes are negative for European growth (and tax receipts) and for prices of sovereign debt.
Finally, the expansion of the European Financial Stability Fund or EFSF is seen as critical for dealing with the contagion that has now engulfed Italy. The European Financial Stability Fund has been underfunded since its inception due to constraints over the AAA ratings of the bonds it issues to fund itself. The original lending facility was under E250 billion, but was just boosted to E440 billion under the July 21st agreement. With Italy now sucked into the vortex of the downward debt spiral, this fund needed to be expanded to be able to cope with the size of Italy’s debt at around E1.8 trillion. As we learned from the 2008 US crisis, there are numerous structures that can be used to expand lending and help foster confidence in the financial system (ex. TALF). The October 26th Euro zone agreement focused on two leveraged paths that are intertwined: a special purpose investment vehicle(SPIV) and an insurance model. The SPIV would be mandates to invest in sovereign bonds of a country in both the primary and secondary markets. The insurance model appears to be able to absorb first proportion of losses incurred by the SPIV up to 20%. Both structures were deemed necessary, but both structures could “statistically increase member states’ gross debt” and thereby also potentially create conditions for a member country downgrade. The goal was to eventually boos the EFSF lending by approximately E1 trillion.
The concept was to have the EFSF buy the bonds of Italy at auction and thereby significantly reduce Rome’s borrowing costs. To raise capital, the EFSF would issue bonds and have these insured up to 20% of first losses. However, the capital markets appetite for these types of bonds has shrunk due to the volatility in the markets. This means that the leverage for the EFSF would need to be reduced to increase the insurance component to 30% to incent investors to buy these bonds. The new EFSF structure is expected to be in place by the end of November, but remains a question mark until the final structure is presented.
Given the state of the Greek bailout and the form of the private sector haircuts, the inadequate bank recapitalizations and the still unformed, levered EFSF fund, it should surprise no one that the October relief rally in risk assets has stalled and volatility has remained. There are many unanswered questions that need to be resolved and structures that need to be concretely put in place to create the conditions for a stable and sustainable European fiscal environment. Going forward, this translates into continued uncertainty for the financial markets. However, the fact that Europe has moved this far is a welcome sign and bodes well for containing the debt disease to allow enough time for a cure.
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2020: the year mortgages went digital
By Francesca Carlesi, co-founder and CEO, Molo
It’s safe to say that the past year has changed everything. With restrictions in place that limited almost every aspect of our lives, from work to socialising, it’s no surprise that some industries were decimated and others were left severely shaken. The mortgage sector was no exception, as it also underwent a vast transformation which may have changed the course of mortgages forever.
The industry saw a paradigm shift, which was driven by consumers being forced online. This was the case for everything from mortgage applications to online house viewings and property valuations. As expected, this resulted in an increased demand for digital mortgage solutions with more flexibility.
While the industry was already slowly shifting, the pandemic has accelerated this and now the traditional process of getting a mortgage is increasingly coming under threat. We’ve seen a number of somewhat surprising trends over the last year that support this argument and suggest that consumers are embracing the change. For example, compared to March last year, we’ve seen the number of people aged over 45 applying for a mortgage loan increase by 70%. This indicates that consumers who may have previously resisted applying for a digital mortgage saw no alternative option in lockdown.
It seems that this paid off, as our data suggests that overall consumers were more satisfied with the simpler and quicker process.
A shift in behaviour
It’s clear that the pandemic did nothing to discourage those seeking a mortgage from doing so and the industry continued to grow. For example, in October last year, the UK mortgage industry saw a 13-year high, where over 97,500 loans were approved – the highest figure since September 2007, the month at the start of the financial crisis. But what led to this and why?
In a post-pandemic world of financial uncertainty and instability, the idea of purchasing property is now being perceived by many as a safer bet than investing in the stock market or other investment options.
As a result, buy-to-let properties are becoming an increasingly appealing option and Google has now coined it as ‘breaking out’. Not only did Google trends observe a 5000% increase in the search term ‘how to get a buy-to-let mortgage’ last year, but at Molo, our own data also supported this and found a significant rise in the number of first-time buyers who were mortgage hunting.
Despite being introduced twenty years prior to buy-to-let mortgages, let-to-buy mortgages also saw huge growth in 2020. The pandemic has led to increased numbers of remote workers and commuting has become a thing of the past. UK cities are seeing somewhat of a mass exodus as the priorities of city dwellers are changing and many are going in search of more space. Let-to-buy mortgages offer the flexibility to facilitate this. Investing in this kind of mortgage means that families, for example, can afford to rent out their property in the city and move to locations that are more rural.
We’ve also seen the industry pivot slightly in terms of regional demands. While there is continued demand from London and the South East, for example, we’ve also seen growth in areas such as the North West and we predict this won’t slow any time soon. One of the cities with especially high demand was Blackpool, where growth in demand was twice the national average.
Future gazing: 2021 and beyond
We’re expecting that the changes seen across the industry over the past will stick. After all, if even the sceptical customers were happy with the ease and simplicity of the online mortgage application and approval process, why on earth would they go back?
It’s important that we learn from these observations and use them to draw insight into the future of the mortgage sector. For instance, while Coronavirus has certainly caused disruption for lenders and consumers alike, it’s also highlighted the need for a more advanced, digital offering. It’s shown that digital mortgages really have become the best option for customers. The pandemic has been a test run for businesses and has proved that, even after restrictions are lifted, there is no good reason for mortgage providers to return to the traditional but slower business-as-usual.
At least in the property world, 2020 could well be remembered as the year that mortgages went digital. While it’s true that the pandemic was the catalyst for this shift, it’s now gone beyond the virus. The changes we’ve seen over the past year are likely to shape the mortgage industry for years to come.
EU finance chief says UK’s Northern Ireland move a breach of trust
DUBLIN (Reuters) – The European Union’s finance chief said Britain’s decision to make unilateral changes to Northern Irish Brexit arrangements raised questions over whether it can be trusted in future trade negotiations with any partner.
“It does open a question mark about global Britain, if this is how global Britain will negotiate with other partners. Our experience has been not an easy one to put it mildly,” Mairead McGuinness, who is negotiating post-Brexit financial services terms with Britain, told Irish broadcaster RTE on Thursday.
“We have to be very clear that when something happens that is not appropriate and indeed in our view breaches both trust and an international agreement, then we have to call it out. It wasn’t a good day yesterday but this morning we have to work for practical solutions, with the UK, not separately.”
(Reporting by Padraic Halpin; editing by John Stonestreet)
The Benefits of Starting A US Non-Profit: The Latest Tax Regulations
Starting a nonprofit organisation can be a very effective way of significantly improving your society’s welfare, and truly assisting those in need. Ultimately, however, understanding all the prerequisite steps mandated to start a nonprofit– as well as the legal obligations and privileges that can be associated with such a process, is crucial before fully committing to and moving forward with your business plan.
Growing a prolific, successful, and impactful non-profit can be a very tedious process and can commonly involve years of consistent effort, diligence, and determination. Consequently, this article will take a deep dive into the relative statutory and federal legislation and critically analyse the plethora of economic, monetary, and social benefits that starting a nonprofit can bring in for you.
Non-profit Organisations: A Quick Overview
Regardless of whether your goal is to address a particular societal issue, form a trade organisation or perhaps create a social club, if you are looking for the opportunity to earn a profit on top of accomplishing your stipulated goals, forming and operating a nonprofit organisation may be the way to go.
Contrary to most social clubs- which are formed to solely provide benefits for their specific members, nonprofits are generally created to provide benefits to the general public. These can include corporations created for educational, scientific and charitable purposes and- as we will further analyse below, are commonly exempt from paying corporate income taxation in accordance with Section 501(c)(3) of the Internal Revenue Code.
The Financial and Structural Benefits of Starting a Non-profit
As briefly touched on above, forming a nonprofit organisation can provide a plethora of benefits for you, these include:
- Tax Exemptions- companies that are categorized as ‘public charities’ in accordance with section 501(c) of the Internal Revenue Code are generally exempt from paying corporate income tax on a state and on a federal level. Additionally, after a company has obtained their aforementioned ‘tax exempt’ legal status, a person’s or company’s monetary donations to them is tax-deductible.
- Grant Opportunities- There’s a prolific amount of both public and private bodies that unilaterally limit their charitable donations and grants to public charities only. This is because nonprofits can- and commonly do, offer tax deductions to such individuals or corporate entities on an exclusive basis.
- Unique Corporate Structure- A nonprofit organisation operates as its own unique legal entity- completely separate from its owners and founders, and consequently is in a position to place its own interests and corporate ethos above the interests of the persons that may be associated with it.
- Limited Liability & Perpetual Existence- On top of having a statutory right to exist in perpetuity, nonprofits also have limited liability under the law. Therefore, any damages that may arise from potential legal disputes are limited to the real assets of the actual nonprofit, and not the assets of its founders and/or owners (subject to specific legal exemptions).
Final Overview: The Potential Disadvantages of Forming a Nonprofit
Despite all the advantages laid out above, it should be duly noted that there are a couple of potential disadvantages to forming a nonprofit that you may want to consider before moving forward with your plan.
Firstly, the process of forming a nonprofit can take a significantly long period of time and this is commonly associated with a great deal of both effort and capital. Moreover, in order to apply for some of the benefits listed above- including federal tax exemption, a monetary fee is required and the process also often needs a present attorney or corporate accountant to serve as a corporate consultant.
Furthermore, there are a couple of practical disadvantages to starting a non-profit organisation. These include: a) excessive paperwork- as all nonprofits are legally required to keep detailed analytical records of their practices and submit them to their relevant state de[artment and to the IRS, and b) limited personal control over the organisation- this is particularly the case in states that require nonprofit organisations to have more than one director.
Finally, nonprofits are commonly subject to prolific levels of public scrutiny- especially in relation to their finances, which may act as a disincentive for some private individuals.
Overall, starting a nonprofit can bring in a plethora of economic, monetary, and social privileges for the individuals involved, and- although the process can come with a few potential inconveniences, they are arguably a small price to pay. Companies like TRUiC advise on the varying benefits of different states when it comes to US formations. It is worth conducting thorough research before making your next move.
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