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“We planned to allocate another tranche according to that arrangement. Yet in the current situation we have many questions as to how the money will be used and how it will be paid back,” said Russian Finance Minister Anton Siluanov, according to ITAR-TASS this morning.
- *RUSSIA URGES RESPECT FOR UKRAINE SOVEREIGNTY, LEGITIMATE GOVT
Russia has suspended another tranche of financial aid for Ukraine because of the current tensions and plans to wait until the situation stabilizes to resume support afterwards, Russian Finance Minister Anton Siluanov told Bloomberg on Friday commenting on the Irish Stock Exchange’s report on Ukraine’s refusal to sell two-year Eurobonds of $2 billion. Russia was to buy bonds under the already approved $15 billion aid package.
“We planned to allocate another tranche according to that arrangement. Yet in the current situation we have many questions as to how the money will be used and how it will be paid back,” said Siluanov.
Conditions for the second tranche were similar to those of the first, namely a two-year loan at a rate of 5 percent per annum, Siluanov added.
He also doubted the feasibility of currency interventions to support the hryvnia amid political instability.
“The national bank of Ukraine can now make efforts to bolster the hryvnia, but demand for foreign currency amid political uncertainty will remain high,” he said. “Therefore, interventions can prove a waste of gold and currency reserves that will lead to nothing and will not prevent the hryvnia’s devaluation.”
Of course, we suspect the “deal” does nothing to change their minds – especially as it increases the uncertainty of what the Russian aid will be used for.
While manufacturing and services PMIs disappointed, the big problem in big China remains that of an out-of-control credit creation process that is blowing up. As we previously noted, instead of crushing credit creation, the PBOC’s liquidity rationing has forced distressed companies into high-interest-cost products in the shadow-banking world. Investors on the other side of “troubled shadow banking products” had assumed that ‘someone’ would bail them out but this evening Reuters reports that ICBC has confirmed that it will not rescue holders of the “Credit Equals Gold #1 Collective Trust Product”, due to mature Jan 31st with $492 million outstanding. The anxiety from contagion concerns of the first shadow-banking default has pushed the Shanghai Composite back near 2,000 for the first time since July – and to its narrowest spread to the S&P 500 in almost 8 years.
The Shanghai Composite is tumbling… to six month lows (and back near 2,000 for the firs time since July)…
and its closest (nominally) to the S&P 500 in almost 8 years…
…borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP).
Understandably, the PBOC does not look upon the shadow banking sector favorably. Since shadow-banking sector gets its short-term liquidity mainly through interbanking loans, the PBOC thought that it could put a painful squeeze on this sector through reducing liquidity. Apparently, the PBOC underestimated the effects of its measure. Largely because Chinese borrowers tend to cross-guarantee each other’s debt, squeezing even a relatively small number of borrowers could produce a cascade of default. The reaction in the credit market was thus almost instant and frightening. Borrowers facing imminent default are willing to borrow at any rate while banks with money are unwilling to loan it out no matter how attractive the terms are.
Should this situation continue, China’s real economy would suffer a nasty shock. Chain default would produce a paralyzing effect on economic activities even though there is no run on the banks. Clearly, this is not a prospect the CCP’s top leadership relishes.
So the PBOC’s efforts are merely exacerbating the situation for the worst companies… for example… Zhenfu Energy…
Industrial and Commercial Bank of China, the world’s largest bank by assets, said on Thursday that it has no plans to use its own money to repay investors in a troubled off-balance-sheet investment product that it helped to market.
ICBC’s shares have fallen this week amid speculation that the bank would be forced to help repay investors in a 3 billion yuan ($496.20 million) high-yield investment product issued by China Credit Trust Co Ltd but marketed through ICBC branches. The product is due to mature on Jan. 31.
“Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product),” an ICBC spokesman told Reuters by phone on Tuesday.
The trust product, called “2010 China Credit / Credit Equals Gold #1 Collective Trust Product”, used the funds it raised from wealthy investors in 2010 to make a loan to unlistedcoal company Shanxi Zhenfu Energy Group Ltd.
But in May 2012, Zhenfu Energy’s vice chairman, Wang Ping Yan, was arrested for accepting deposits without a banking licence.
Which Barclays warns:
In our view, despite the trust issuer, distributor bank and local government perhaps trying to bail out the mining company, the regulators and central government could probably allow the trust product default to happen as:
- government appears fairly determined to reform the financial system and cut off the implicit guarantee of financial institutions;
- the State Council is reportedly streamlining regulation of shadow banking including trust business; and
- the default of trust products could have less social impact than the default of WMPs, bonds and other products sold to the general public or have problematic practices, such as asset-pool investments.
In our view, the default of trust products could trigger some short-term negative impacts on China’s financial sector and the reputation of financial institutions. However, we believe it is positive for the healthy development of financial system in the long run because the default could do the following:
- Be a step to reduce the implicit guarantee of financial institutions for investment products. Banks could shift their financial liabilities back to the investors.
- Increase the risk awareness of both investors and financial institutions, which could correct the pricing of investment products to more risk-oriented.
Its conclusion is dire: “If the trust product goes into default, we believe it would be the first default to test the financial system.”
Here is the product…
And the growth of such products has been enormous as we have explained in great detail previously: at RMB10.1 trillion as of Q3 should the first domino fall, watch out below.
Finally for those who have forgotten, below is a quick schematic of what a WMP looks like:
“There is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.”
The “eerie resemblances” – as Soros previously noted – to the US in 2008 have profound consequences for China and the world – nowhere is that more dangerously exposed (just as in the US) than in the Chinese shadow banking sector as explained above.
There’s no question that the consumer has been leveraged up,’ Royal Bank CEO says
The Canadian Press Posted: Jan 14, 2014 2:08 PM ET Last Updated: Jan 14, 2014 2:08 PM ET
Canada’s biggest banks say consumers are reaching the limit on how much they can afford to borrow, and that’s likely to slow loan growth this year.
Royal Bank chief executive Gord Nixon said Tuesday he expects Canadian households will begin to show more restraint.
“In terms of pure consumer lending (growth), we’ll probably be operating at a much lower rate than we have been over the last few years,” he told a bank industry conference.
“There’s no question that the consumer has been leveraged up.”
Low rates will end
Canadians have taken advantage of low interest rates for years, borrowing record amounts, but leaving them vulnerable.
Policy-makers have expressed concern that a sudden rise in interest rates would leave many consumers unable to meet their payments, potentially causing a fallout that ripples through the housing market and consumer spending.
Statistics Canada reported last month that household debt touched an all-time high during the third-quarter of 2013, inching up 0.6 percentage points to 163.7 per cent over the summer months. The increase means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.
Nixon said he expects consumer lending growth to remain tight, rising by mid single-digit levels, for “an extended period of time.”
“What would be the most healthy outcome for the marketplace is for there to be a steady, orderly increase in interest rates to a reasonable level,” he said.
Focus away from consumer loans
Bank of Montreal chief executive Bill Downe said a slower increase in the debt levels of Canadians would help shift away from a dependence on the consumer for overall economic growth.
He expects U.S. business loans will become a more dominant force in the banking industry this year.
“We’re going to benefit from continued strong commercial and industrial loan growth and I think that’s going to spill over into Canada,” he said.
Downe said as consumers borrow less they will focus more on saving, which will benefit the wealth management business.
Scotiabank chief executive Brian Porter said he’s comfortable with the credit quality from its customers and doesn’t see any major concerns developing in the real estate market either.
“We would view supply and demand relatively in check across the country,” he said.