Finance
Judging Europe’s success in dealing with its bad-debt problem
Monte dei Paschi di Siena’s securitisation of EUR 24bn in non-performing loans is a stark reminder of the gravity of Europe’s bad loan problem. At the same time, it is a sign of how successful banks have been in reducing NPL exposures.
The securitisation by the Italian lender raises the broader question of whether NPLs are still a serious issue for policy makers and bankers in Europe. Scope Ratings analysts Sam Theodore, head of financial institutions ratings; Giacomo Barisone, head of sovereign ratings; and David Bergman, executive director, structured finance, sat down recently to debate this vexed topic. Scope’s team agree that from a macroeconomic perspective the problem of the outstanding EUR 813bn in NPLs is nuanced.
“As the Global Financial Crisis showed, problems on banks’ balance sheets can quickly spread to the broader economy, affecting jobs and public finances,” says Barisone. “The ECB is concerned that, even if the current economic rebound in Europe helps banks further reduce their NPLs, the higher the level of bad loans when the next economic slowdown or financial shock comes, the harder it will be for authorities to protect Europe from a future crisis.”
The steady reduction in NPLs – cut by a third from EUR 1.12tn at the end of 2014 amid rebounding growth and the success banks have had in offloading them to private investors – does mean that bad loans are less of a drag on the EU economy than they used to be, and less of a problem for the banking sector itself.
“Fewer and fewer banks have massive asset quality problems. It’s a legacy issue which is decreasing by the quarter,” says Theodore. “I would be more worried about the large exposures banks have to the debt of their home sovereigns, which are still zero-risk weighted.”
Among recent European Commission proposals to accelerate the transfer of bad debt from banks’ balance sheets were measures to develop the secondary market. “An active secondary market would increase the options available to offload NPLs and would make it easier to value them. Data from actual transactions needs to be more readily available; most performance data are still private,” says David Bergman.
In the eyes of many, bad debt is no longer a source of systemic risk. Those who support this view point to declining NPL ratios, which at the end of 2017 fell to 4% for the European Banking Authority’s sample of 149 banks. That was the lowest since 2014. Rather than a system-wide issue, this suggests NPLs are an idiosyncratic problem restricted to a limited universe of banks in a limited number of countries.
Still, the aggregate amount of NPLs remains high. “Recent data have shown that economic growth in the euro area has lost some momentum, so this is no time for regulators, governments, and bank executives to become complacent,” says Barisone.
Finance
Elon Musk says bitcoin is slightly better than holding cash
(Reuters) – Tesla Inc CEO Elon Musk on Thursday said that owning bitcoin was only a little better than holding conventional cash, but that the slight difference made it a better asset to hold.
“However, when fiat currency has negative real interest, only a fool wouldn’t look elsewhere,” Musk said in a tweet. “Bitcoin is almost as bs as fiat money. The key word is ‘almost’.”
He also defended Tesla’s action to invest in bitcoin, saying that the difference with cash made it “adventurous enough” for the S&P 500 company to hold the cryptocurrency.
Tesla’s $1.5 billion bitcoin purchase set the cryptocurrency soaring toward this week’s record peak above $50,000 while Musk’s recent promotion of dogecoin on Twitter also lifted the price of that cryptocurrency.
Bitcoin was steady just below a record peak of $51,284 on Friday.
(Reporting by Aishwarya Nair and Shubham Kalia in Bengaluru; Editing by Sam Holmes)
Finance
COVID response drives $24 trillion surge in global debt: IIF
By Marc Jones
LONDON (Reuters) – The COVID pandemic has added $24 trillion to the global debt mountain over the last year a new study has shown, leaving it at a record $281 trillion and the worldwide debt-to-GDP ratio at over 355%.
The Institute of International Finance’s global debt monitor estimated government support programmes had accounted for half of the rise, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively.
It has meant that debt as a ratio of world economic output known as gross domestic product surged by 35 percentage points to over 355% of GDP.
That upswing is well beyond the rise seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective debt-to-GDP jumps.
There is also little sign of a near-term stablisation.
Borrowing levels are expected to run well above pre-COVID levels in many countries and sectors again this year, supported by still low interest rates, although a reopening of economies should help on the GDP side of the equation.
“We expect global government debt to increase by another $10 trillion this year and surpass $92 trillion,” the IIF report said, adding that winding down support could also prove even more challenging than it was after the financial crisis.
“Political and social pressure could limit governments’ efforts to reduce deficits and debt, jeopardizing their ability to cope with future crises.”
“This could also constrain policy responses to mitigate the adverse impacts of climate change and natural capital loss,” it added.
EUROPE DEBT
Debt rises were particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece increasing some 50 percentage points.
The rapid build-up was mostly driven by governments, particularly in Greece, Spain, Britain and Canada. Switzerland was the only mature market economy in the IIF’s 61-country analysis to record a decline in its debt ratio.
In emerging markets, China saw the biggest rise in debt ratios excluding banks, followed by Turkey, Korea, and the United Arab Emirates. South Africa and India recorded the largest increases just in terms of government debt ratios.
“Premature withdrawal of supportive government measures could mean a surge in bankruptcies and a new wave of non-performing loans,” the IIF said.
However, sustained reliance on government support could pose “systemic risks” as well by encouraging so-called ‘zombie’ firms – the weakest and most indebted corporates – to take on even more debt.
(Reporting by Marc Jones; Editing by Toby Chopra)
Finance
Bitcoin’s record price unsustainable without lower volatility – JPMorgan
LONDON (Reuters) – Bitcoin’s charge to a record north of $50,000 isn’t sustainable unless the cryptocurrency’s price swings cool down quickly, JPMorgan analysts said in a note.
The world’s biggest digital currency hit a record of $51,300 on Wednesday after smashing the $50,000 mark for the first time a day earlier, fuelled by signs it is winning acceptance among mainstream investors and companies.
Bitcoin’s three-month realised volatility, or actual price moves, is 87% versus 16% for gold – an asset proponents say it could threaten, the U.S. investment bank said in a note published on Tuesday.
The value of all bitcoin in circulation has swollen to $900 billion from $200 billion in September, the analysts said. The $700 billion jump has come the back of a total flow of just $11 billion from institutional investors into major trusts and futures markets.
Bitcoin’s limited supply – based on “miners” producing a set number of new coins – has led to a holders charging a premium on bitcoin coming to market, JPMorgan said. Retail flows may have also magnified institutional flows, it added.
(Reporting by Tom Wilson; editing by Thyagaraju Adinarayan)
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