Daily News Roundup 2012: Friday 30 March

Good morning

The headlines:

1. Oh MTN... Turkcell is accusing the Ayoba folk at MTN of having far too Ayoba a time in Iran. The dispute is over the Iranian mobile-phone licence (apparently - there is/was only one on offer). Turkcell got granted it first in February 2004, at which point MTN allegedly began 'Project Snooker',  as it's termed in alleged internal memos. According to Turkcell, 'Project Snooker' included bribing officials (tsk), arranging meetings between Iranian and South African leaders (hardly a crime), and promising Iran weapons and United Nations votes in exchange for a licence (!!!). The UN votes weren't really votes so much as abstentions: South Africa abstained from three votes on Iran's nuclear program at the United Nations International Atomic Energy Agency (IAEA). Three days after abstaining from a vote held on 24 November 2005 - the licence was delivered to MTN. At the same time, MTN officials apparently used their influence with then Minister of Defence, Mosiuoa Lekota (of the Arms Deal fame), to secure the delivery of defence equipment to Iran. The case has been lodged in Washington. Turkcell is suing for $4.2 billion worth of damages. Observation: it sounds like a Dan Brown novel plot. Also - I keep getting random "please call me" smses that are proudly being brought to me by MTN. The elderly woman that I keep calling has no idea what I'm talking about. Link: When Ayoba Goes Too Far.
2. Iran has started accepting payment for its oil in kind. Barter transactions - gold, wheat, etc. China and India are apparently at the head of the list. Where there's a well, there's a way. Link: India and China skirt Iran sanctions. 
3. The Republican House of Representatives have passed another budget that is doomed to fail when it hits the Democrat Senate. All the usual spending cuts for Obamacare and no tax impacts on the rich. Frankly, I think they should just pass it. Better to start somewhere than to continually argue. Link: A New/Old Republican Budget. After all, there is this looming in the background: The Four Numbers that add up to an American Debt Disaster.
4. The South African Reserve Bank left the repo rate unchanged at 5.5% yesterday. Link: SARB leaves key lending rate unchanged.
5. And the African News in Brief. Link: ABN Briefs. The highlights:
• Ethiopia's privatisation is underway, with the government accepting bids worth $121 million for seven state-owned companies.
• South Africa's ABSA bank has repudiated union claims that it has undertaken large scale retrenchment.
• The IMF has approved the release of the final instalment of Angola's $1.4 billion loan agreement made in 2009. 

That's all for now.

Happy Friday.

Daily News Roundup 2012: Thursday 29 March

Good morning

The headlines:

1. The MF Global story continues with breathless drama - as Edith O'Brian, the assistant treasurer who now lies at the centre of the $200 million transfer scandal - invokes her number-something amendment right to not testify in front of the House Financial Services Committee. On Monday, I wrote something about MF Global's former CEO Jon Corzine, who was being accused of authorising a transfer of $200 million from a customer account to settle a brokerage account with JP Morgan Chase. Well - since then, he seems to have been vaguely exonerated by lacking explicit knowledge that the funds came from a customer account. Edith, however, organised the actual transfers. And she's the hand behind the "Per JC's direct instructions" line on the infamous memo. We're all as disappointed as the House Committee. Link: MF Global Assistant Treasurer refuses to answer questions.
2. Global investors are selling more Indian bonds than they're buying. It's the first time that the Indian government has faced a market net selling position since October 2010. And moreover - the Indian government is planning on raising 65% of its annual borrowings in the first half of the year, compared to 49% in the same time period last year. Presumably, the borrowing increase is a result of rising oil prices, which will push up the cost of subsidies incurred by the Indian government (according to Bloomberg, oil accounts for 23% of the total current subsidy cost). At the same time, I would think that the bearish attitude of investors may have something to do with those Iranian oil sanctions. Investors are skittish. Sanctions are bad publicity with a neat tag-line. Solutions to the sanctions? Long, complicated, misunderstood. Maybe we should all buy Indian bonds? Link: The Indian Debt Sell-Off.
3. The Spanish Unions are preparing to strike over labour laws and austerity measures. Spanish PM Mariano Rajoy and his three-month old government are unlikely to be responsive. The issue is whether the current policies will fix the 23% unemployment rate, as well as the deficit in public finances. Question: are the unemployed part of unions? In which case, why are the Unions striking? The employed strike and the unemployed publicly protest. Confused. Link: The Spanish General Strike over Unemployment.
4. And the Africa Business News in Brief. Link: ABN Briefs. The highlights:
• The Comoros have awarded their first-ever oil exploration and production licence, to a private Kenyan company.
• Uganda is also set to auction four more oil exploration blocks early next year.
• Fuel Marketer Total Kenya reported a 96% drop in full year profit. This was apparently due to the interaction between rising input costs, and the inability to change pricing owing to price controls. Not ideal.
• The World Bank has approved a $132 million zero-interest loan to Cameroon to help them build a new hydroelectric dam.

And that's all for now.

Happy Thursday.

Daily News Roundup 2012: Wednesday 28 March

Good morning

The headlines:

1. To return to the ongoing Iran sanction saga, India is supposedly going to start paying for its Iranian oil in rupees. The Iranians would prefer to be paid in forex (who doesn't?); and from what I can tell, current payments are taking place in Euros, with the majority of payments being transferred through Turkey (as the US banks are being awkward). However, when EU sanctions begin in July, Turkey says that it will no longer be able to process those payments (despite Turkey not being part of the EU as yet). When that happens: payments in rupees. Transfers are likely to take place through the state-run UCO Bank, which doesn't have US operations and therefore is unlikely to be impacted by the sanctions. Link: Iran and India.
2. In what sounds like a recycled news item, the Europeans say that the crisis is nearing its end, but Ben Bernanke warns that a US recovery isn't assured. Yawn. Link: the Europeans say that the crisis is nearing its end, but Ben Bernanke warns that a US recovery isn't assured.
3. The Magic Johnson group has won a bid to buy the bankrupt L.A. Dodgers for $2 billion. I'll be honest - each time I see someone buying a sports team, I wonder how much of that purchase makes economic sense, and how much of it is just "heart" (read: irrational bursts of stimulant chemicals in response to external stimuli). On the one hand: stadiums, merchandising, fans who "heart" the team and will pay for season passes and such. On the other hand: the L.A. Dodgers is bankrupt. And there's an ex-wife involved. And Fox TV making a noise about their television rights. How much magic do you need? Link: Magic Johnson Group to buy LA Dodgers.
4. South African Reserve Bank governor, Gill Marcus, is set to announce the results of the MPC meeting later today. According to all 18 economists surveyed by Bloomberg, the rate is expected to remain unchanged. Presumably, this is on the back of last month's inflation data, which showed inflation falling to 6.1%. Link: SARB may delay raising interest rates.
5. And the Africa Business News in brief. Link: ABN Briefs. The highlights:
• South Africa's Government Employees Pension Fund (GEPF), the country's largest retirement fund with a portfolio of around $150 billion, is set to expand its investments into Africa and global portfolios in order to diversify risk. Of course - their portfolio base may also be getting just a touch too big for the SA investment market. 
• Illiad Africa's headline earnings have dropped by 76%. Now that's awkward.
• Zambia's Central Bank is set to introduce a benchmark interest rate from the beginning of April to replace the money supply targeting that has been their principal policy tool up to this point.

And that's all for now.

Happy Wednesday.

Daily News Roundup 2012: Tuesday 27 March

Good morning

The headlines:

1. Dominique Strauss-Kahn, former head of the IMF, has been charged with "illegally procuring prostitutes".  I realise that this is no longer finance-related. But juice is juice. And I was intrigued: because how do you illegally procure prostitutes? I was under the impression that either prostitution is legal or it isn't. Apparently not. The issue in France: it's totally fine to find your own fun; but it's not fine when your mate finds it for you. So really, he should be charged with "illegally having prostitutes procured for him". It's a crazy world. Link: D S-K and the Carlton Sex Ring.
2. Apple CEO Tim Cook is in China and planning more investment therein. Apple has recently signed a deal a second Chinese telecom provider, China Telecom Corp. - this has doubled their potential customer base in the country. Strangely, Apple has not signed on with China Mobile Ltd, the largest telecom carrier in the world by customers. Apparently, the iPhone does not work on China Mobile's "home-grown" 3G network. I wonder if it's a stand-off between giants... Apple: "We are the world. Change your network". China Mobile: "We are the people. Change your phone". Link: Apple Plans Further Chinese Investment.
3. So in case anyone missed in, Jim Yong Kim was the surprise US nomination for World Bank president, and he's coming under criticism for being anti-economic growth. Now this is really interesting for a number of reasons. Firstly, he's not Hillary Clinton. Secondly, he's not someone else. Thirdly, he's very experienced at World Health - which I find strangely ironic. If there's no doctor in the house, call one in? Admittedly, he's not an expert in World Economic Health - but I reckon that the principle is the same. Capital flows and blood flows: when too much blood pumps, you get high blood pressure, a clot, and an aneurism. I think that the technical term is "the boom and bust cycle". And whence cometh the criticism? Well - he wrote (actually, he co-edited) a book called "Dying for Growth" that argued that neoliberalism and corporate-led economic growth has actually left the poor and middle classes in developing countries worse off. Uproar! Except for the libertarians, who are nodding heads sagely in agreement. Folks: I think that the evidence is empirical. Either way - the argument is that economic growth is not enough - it needs to be sustainable (ie: a function of something other than monetary stimulus). Agreed. I'm a fan. Link: US World Bank Nominee Under Fire.
4. Greg Smith, Mr "Goldman Sachs calls clients 'muppets' and I'm leaving in a huff", is shopping around for a publisher. Actually - he's auctioning off the rights to publish the tell-all (smart guy - no doubt). The price-tag may be as high as $1 million: which maybe seems a bit low, considering the types of bonus one would have had at GS? Dealbreaker.com is asking around for title suggestions. Thoughts? I'm voting with "Way Lost, Weigh Less: Helping Miss Piggy". Link: The Goldman Tell-All. 
5. Ben Bernanke says that accommodative monetary policy is still needed. I don't have too much to add. Maybe the new World Bank nominee would ask if this is a bit like treating a headache with morphine? In the end, everything will slow down. Link: Bernanke says accommodative policy still needed.
6. And the African Business News in Brief. Link: ABN Briefs. The highlights:
• HSBC is looking to sell its retail banking and wealth management operation in Mauritius.
• Chinese-run miner Anjin, the largest in Zimbabwe's Marange diamond fields, has ended a two-day strike by agreeing to a 25% wage increase for workers. Previous walk-outs have taken place over "beatings by management". Hectic.
• More natural gas has been discovered off the coast of Tanzania by BC Group and Ophir Energy than previously anticipated.

And that's all for now.

Happy Tuesday.

Daily News Roundup 2012: Monday 26 March

Good morning

The headlines:

1. For those of us that missed the Friday fun, I'm going to start with the BATS IPO debacle. *HILARIOUS*. And I know that I sound like a bit of a teenage girl for reacting that way, but I make no apologies. So BATS is an acronym for "Better Alternative Trading System" - which essentially makes BATS Global Trading Inc. a stock exchange in its own right. However, unlike the traditional stock exchanges that we're familiar with (like the Dow Jones or the JSE), BATS is open 24 hours a day. The exchange is underpinned by its ECN (or Electronic Communications Network), which is the financial term for a computer trading system that will match buy and sell orders outside of normal exchange hours (I wiki'ed it). So that's the background. Recently, BATS announced an IPO of 6.3 million shares at $16 a pop, underwritten by Morgan Stanley, Citigroup and Credit Suisse. And it was going to list on its own exchange. At 10:30 am American time (one of those timezones) of Friday, trading opened with the first trade taking place at $15.25. At 10:57 am, the IPO was pulled and cancelled. And the share price was being recorded at $0.02. Why? Software glitch. Egg on face: they have it. Link: BATS CEO scuttled IPO on potential for erratic trading.
2. Everyone is still concerned that China's "soft-landing", however engineered, will still be a problem for commodities markets and all related-production parties. Despite various revisions to China's growth forecasts (most analysts are predicting Chinese stimulus to push up growth), this doesn't change the fact that there are stockpiles (at least - that's the way I read it). Link: China's Soft Landing Hard on Commodities.
3. Oh - the other Friday news: MF Global's Jon S. Corzine apparently authorised the transfer of $200 million from a customer's account to settle one of the company's brokerage accounts with JP Morgan. That transfer took place on October 28. The company collapsed/filed for bankruptcy on October 31. FYI: MF Global was one of the world's major traders in derivatives (futures, forwards, etc - basically anything financial that derives its value from some kind of underlying asset - such as a share, or a commodity like gold). What does the transfer mean? <insert blasphemy here>. Let me rephrase the issue: if I took $200 million from my friend Peter and used it to pay my friend Jon-Paul, that would make me more successful than Bonnie and Clyde. And that ended on a small road with a number of guns and a dramatic soundtrack. Fun. And then they go after Jon-Paul to get the money back. Link: The Chairman in the Board Room with the Dirty Memo.
4. Italian Prime Minister Mario Monti has warned that Spain may be the new Greece. Spain is struggling to balance its deficit. That said: lots of European countries are at risk of being the new Greece. But Spain - Spain is fairly large. I think they use the phrase "too big to fail", as if it were an Investment Bank. We shall see. Link: Monti signals Spanish Euro Risk.
5. Frontier Currencies are being flooded with speculator cash as the markets search for returns. The focus is on countries with high growth rates and/or a strong reliance on commodities. Which is unfortunate - because as the money comes in, those currencies appreciate. And strong currencies tend to weaken economic growth - especially in resource-driven economies that export their products. The inflow of cash also tends to spark asset-pricing bubbles. Such a cost. Link: Frontier currencies irresistable.
6. And the Africa News in Brief. Link: ABN Briefs. The highlight:
• Kenya's East Africa Cable Company posted an 80% increase in full year pre-tax profit. Madness. However, some of this can be attributed to the weakness of the shilling, which has made exports more competitive.

That's all for now.

Have a great Monday.

Daily News Roundup 2012: Friday 23 March

Good morning

It's Friday.

The headlines:

1. After the Agribank Branch story yesterday, China's Agribank announced that its quarterly profits unexpectedly fell for the first time in 2 years. Net income declined 14% - and those 20 analysts from the Bloomberg survey were expecting a 17% increase! Awkward (again). The reason for the increase is given as the government's attempts to curb property spending. They have done this by tightening credit (ie. restricting the number of mortgage loans that can be given out) and by imposing higher mortgage rates (ie. forcing lower demand by raising the cost). The corollary of this is fewer customers and higher bad debts/defaults for the lenders. My question: if China has artificially restricted lending - what difference will changing the reserve ratios of the branches make? In theory, the branches could lend more. Legally, it looks like they can't. And then? Link: Agribank's profits drop.
2. The president of the Fed of St Louis has said that US monetary policy is at a turning point. One day, I'm going to have to work out how the Fed actually works because there seem to be a great number of presidents. Anyway, Mr Bullard says that we can expect an interest rate hike as early as late 2013. So not really at a turning point so much as squinting your eyes and making out a grey haze on the horizon. Other Fed presidents disagree. Or didn't comment. Either way, the turning point will only become clear once some of the economic effects of the current policies become more evident. Link: The US Fed Turning Point.
3. South Africa's Foreign Ministry has announced that it will be reducing its imports of oil from Iran. According to Ebrahim Ebrahim (the Deputy Minister of the Department of International Relations and Cooperation - so good they named him twice), SA has suspended almost all oil imports from Iran (the source of about 29% of SA's fuel). The South African Petroleum Industry Association finds that "hard to believe" as they haven't yet been informed of the plan; and are only expected to hear from a government task team on the issue at the end of May. Other government spokespeople are saying that the cabinet has not made a decision on Iran. What a mess. Link: South Africa and the Iranian Oil Imports.
4. The commodities bear market is set to continue as analysts predict falling prices of copper. According to this article, industry stockpiles in China have more than doubled since last quarter. And according to the Shanghai Futures Exchange, stockpiles are at their highest level in nine years. It brings me back to the happy reports from a month or so ago, when everyone was excited by the good Chinese manufacturing figures/purchasing manager index figures. I called stock-piling. Smugness: distasteful but fun. Link: The Copper Bear Market. 
5. Randgold Resources' share price has plunged after a coup in Mali. The company has three gold-mines there. Randgold has since announced that those operations remain unaffected. Randgold and the Mali Coup.
6. As a sidebar fun piece, researchers suggest that people may be investing money in online Ponzi schemes even though they know that it's fraudulent. It makes sense in some ways - if you're an initial investors, and you draw out your returns in cash as they're generated instead of reinvesting, you get to be one of the people that genuinely makes money out of Ponzi. That is: as you become aware of the existence of the scheme, you start to act as a scheme operator rather than a scheme participant. Human nature. And greed. Link: The Allure of Online Ponzi Schemes.
7. While we're on the topic of Ponzi schemes, FBI files are revealing how Bernie Madoff deceived his employees. It's so Mafioso with all the Italian names. Link: Madoff FBI Files.
8. And the African News in Brief. Link: ABN Briefs. The highlights:
• Shoprite Holdings is due to issue more shares (around 27.2 million of them - around 5% of current shares in issue), as well as issuing R4.5 billion worth of convertible bonds. They're raising capital to strengthen the balance sheet and for acquisitions. 
• Zimbabwe plans to issue a $100 million infrastructure bond. I wonder if they can find an agency to rate it?

That's all for now.

Have a great Friday!

Daily News Roundup 2012: Thursday 22 March

Good morning

The headlines:

1. Japan has had an unexpected trade surplus for February! Everyone is surprised - particularly the 28 economists that called it dramatically wrong in the Bloomberg survey (just before a big announcement is made - most news agencies and/or traders will do a quick phone-around to get a general feeling of what the market is expecting). The reason for the surprise? Well - trade surpluses occur when exports exceed imports. And Japan - Japan has just mourned the one-year anniversary of the tsunami that shut down some of its nuclear reactors. Therefore, it has to import its energy: in an environment of rising fuel costs. However: the reason for the surplus? Well after the Bank of Japan purchased government bonds, thereby increasing the money supply, thereby depreciating the yen. This has made exporters more competitive, so exports were higher than anticipated. Some economists say that the level of exports is sustainable. I say: the yen appreciated after the announcement. Link: The Japanese Trade Surplus.
2. Visa has suggested that China's decision to allow Citigroup to issue credit cards in China may indicate the start of a "broader market opening". Citigroup will be the first foreign bank permitted to issue credit cards in China. Visa is excited because currently, it is only allowed to process foreign-currency denominated payments in China. Payments in yuan are the monopolistic province of China UnionPay Data Co. According to Elizabeth Buse, Visa group president for business outside the Americas, volume growth was over 50% in China last year. Madness. Link: Visa plans to expand in China when it's allowed to.
3. On the topic, the Chinese Central Bank announced yesterday that it's cutting the reserve ratios of 379 Agribank branches, thereby boosting rural credit. This is part of China's reaction to the "soft landing" that everyone is talking about. When in crisis, give the people more money. Except yes: that's the reserve ratios of bank branches. The Agricultural Bank of China is the country's third largest lender by value. And some of its branches (an original 563 in the original trial, plus the new 379) are having their credit policies loosened. Branches?!  Link: China cuts some reserve ratios.
4. The consumer giant Kraft Foods Inc. (owner of Cadbury's and Hershey's and Oreos) is changing its name to Mondelez. I dare you to try pronounce it. The grocery arm of the business will retain the name Kraft. Link: Kraft name change.
5. And the Africa News in Brief. Link: All Africa Business. The highlights:
• Essar Global says that it will invest $4 billion in Zimbabwe's steel industry over the next 10 years.
• Trade between Nigeria and Brazil has reached $6 billion. It's not clear whether this amount is cumulative or per year. Probably per year though.
• The Bank of Uganda has handed back the Libyan-owned Tropical Bank Limited, which it ceased in March last year as part of UN sanctions.
• Zimbabwean farmers have warned of a food crisis after a third of the country's maize crop was declared a write-off.

That's all for now.

Have a good Thursday!

Daily News Roundup 2012: Wednesday 21 March

Good morning

The headlines:

1. Oil has rebounded from its biggest decline in 3 months. Observation: the price oil movement never ceases to be dramatic in Bloomberg's eyes. "Biggest increase in two weeks". "Two day high". "Biggest decline in three months". Well obviously - the minute you throw in a frame of time reference, things just sound more dramatic. This morning is the earliest I've woken up in 14 years!!! (Based on a rolling average - unadjusted for time zones and heavily weighted in favour of a university student lifestyle). Hmmm. That reporter. Needs to. Calm down. Anyway - the increase (by 0.7% - after declining by 2.3% the previous day) is apparently due to an industry-report stating that US stockpiles of oil have fallen. Saudi Arabia has said that it can increase its supplies by 25% immediately, if necessary. To me - there doesn't seem to be an oil price trend so much as general panic. No doubt heightened by said Bloomberg reporter. Link: Oil price recovery.
2. The US Sanction-Enforcement against Iran (and its customers) continues, with the US granting sanction-exemption to Japan and 10 of the EU countries; who have managed to "significantly reduce" their purchases of Iranian oil. China, India and Korea, however, have qualified for no such exemption - mostly because they continue to buy Iranian oil. This will be awkward, I think. It's like a game of economic chicken: I almost dare Obama to continue steering down the wrong lane, just to see where it goes. And best he carry clean underwear - because I don't think that the Asians play chicken. They serve it sweet and sour, side of dumplings, no credit cards. Cheap shot? No apologies. Link: US exempts Japan and 10 EU countries from Iranian Sanctions.
3. Greece is selling off assets to Turkey. And they're starting with the auction of the operational rights of two sea ports: Piraeus and Thessaloniki. I have to tell you - if this was a shrewd political move, it's magnificent. I think the Greeks would rather not eat. The two sea ports are the big boys: Piraeus is the Athens port, and Thessaloniki is the second biggest city. The ports are going to be followed by the sale of the Greek gas supplier and the national oil refinery. Link: Greece seeks Turkish Buyers.
4. Glencore has agreed to a $6.15 billion purchase of Viterra, which will give the Swiss commodities trader access to the Canadian and Australian grain markets. In case the name sounds familiar, this is the same Glencore of Glencore-Xstrata fame. Lots of M&A activity on the Glencore front. The deal was made in conjuction with two other companies, who will each take over certain portions of Viterra's operations/assets. Viterra shareholders are expected to vote on the transaction in May.
5. Disney is expecting to make a $200 million loss on the movie "John Carter". I'm not sure why people aren't that keen - I enjoyed it. Agreed - it's no Lord of the Rings - but to me it sounds like Disney was expecting to make back its money in a single quarter. I suppose that's when it all happens for a film. You don't expense film costs as they happen - you capitalise it as a type of inventory until you launch the movie. Then you expense it all in a single shot. Ah well. DVD sales and television syndication. Recoupments will no doubt be made. Link: John Carter is a loser.
6. And finally, the Africa Business News in brief. Link: ABN Briefs. The highlights:
• The South African mining minister (Susan Shabangu) is unhappy with the fatality rates in South African mines. As fatalities are still happening, I believe that's the traditional emotional response. 
• AngloAmerican is looking to acquire new iron-ore opportunities in Africa and Australia.
• Sudan is aiming to raise between $1 billion and $1.5 billion with its new Islamic "sukuk" bonds, that will offer stakes in an oil pipeline. Bonds without interest? Fascinated. 
• Zambian maize production is expected to fall by 80% as farmers have moved toward more cash-lucrative crops (such as soya beans).
• Tanzania has cut its coffee output estimate for this season. 

That's all for now.

Happy Wednesday.

LIBOR: Fiddling in the Banking Vatican

Collusion.

It's a dirty word that makes a lot of money until someone proves it. Then it costs a lot of money.

And recently, Bloomberg has been abuzz with the LIBOR-fixing collusion scandal. The banks have been scurrying around not commenting and/or selling other banks down the river. The river Thames, presumably. With the pollution and the pikeys, and a cruise that ends at the Tower of London where lots of famous people have rather famously lost their heads.

But before we get to the head-rolling, some background information. I'd like to start with: what is LIBOR, and why is it important? 

What LIBOR Is

LIBOR is an acronym for the "London Interbank Offered Rate": which translates to "the rate that Bank A would charge Bank B if Bank B wanted to borrow money from Bank A". LIBOR is set every day, in 10 different currencies and for 15 different maturities. So by "LIBOR" what we actually mean is the reference list of all 150 LIBORs. And why is LIBOR important? Well, there are two potential answers to this:

1. The first is that LIBOR is used as the benchmark rate by most of the finance world for almost any transaction. The list of affected instruments is long: standard loans, bond issues, swap agreements, mortgages, forwards, futures, variations of any of these, etc. Not all instruments need to be LIBOR-linked - but it is the general convention for a market worth around $350 trillion. The real question is why is LIBOR the convention? Which leads me to:
2. The City of London is the home of international finance; much more so than any other centre historically. It is also the heart of the most established and long-standing network of tax havens. And by "City of London", we are talking about the square mile stretch in the middle of Greater London: the part that is practically self-governing, where businesses are allowed to vote in elections with a vote-weight proportional to the number of people they employ, and the business vote far outweighs the residential one. It's the banking version of the Vatican. The tax authorities are the minions of Satan, the CEOs are the Cardinals, and the Banks are the monastic orders with their missionary outposts on small tropical islands where much of the real work is done. And Jim Rogers is the Pope with the strange clothing that they roll out on special occasions. And Warren Buffett is Richard Dawkins. And Mitt Romney is a still mormon. 

If anyone has ever wondered how it is that such a small country sets the benchmark interest rate for the world of finance (as compared to, say, New York), the answer is lying there in point 2 above. But that's a topic for another post. The point is that, for quite good reason, LIBOR has become the conventional benchmark rate for most international banking transactions. 

So immediately, it becomes obvious that if there were a small opportunity to influence that rate, one would probably try exercise it (exorcise it?). Particularly if you're a bank. Tiny differences in the rate of interest have dramatic impact when you look at the volume of financing that operates off the LIBOR. To say nothing of how useful it would be to know what direction LIBOR will be taking before it's officially announced each day.

The LIBOR Determination Process

And how do we get LIBOR? The LIBOR list is published daily by the British Bankers' Association (BBA) - or, to continue the fun metaphor, the College of Cardinals: who conduct a Mass survey every morning, and distribute the sacrament to the laity just before noon. The actual ritual is as follows:

1. Every year, the BBA selects between 8 and 16 banks to sit on a panel (one for each type of currency).
2. At around 11am, BBA calls around and asks each banking panel member what they would expect to pay to borrow substantial amounts of money at the range of different maturities.
3. The BBA then collates the data, and eliminates the top 25% and the bottom 25% of the results.
4. The middle 50% is then averaged to give the official BBALIBOR rate.
5. Thomson Reuters publishes LIBOR on the BBA's behalf at about 11:45 am.

One small point (easily ignored): the panel banks aren't meant to speak to each other about their rate suggestions before the BBA calls them each morning.

Hmmm.

A vow of silence before lunchtime?

But cardinals are such chatty creatures!

And as the world is freshly discovering (cue: the resignation saga of Goldman S), gone is the old school British system of stiff upper lips and being invited round for tea with the BoE Governor when the chaps are concerned that you're having a bit of a lark and well, dash it all, but it seems to be affecting the stability of the pound a tad.

No. When the old school were lads, it was all about what one ought to do. Now it's all about what one can get away with - and clients be damned for fools if they fail to realise that what one can get away with is their money.

The Scandal Starts

So what exactly is the price-fixing scandal? Well - everyone is concerned with the period between 2006 through 2008. In 2008, the Wall Street Journal first started reporting rumours of potential price-fixing, and investigation was taken up by the US Department of Justice and the SEC (the Securities Exchange Commission - which the US regulator watch-dog, although the pooch is mostly blind and toothless).

The main reason for the rumour: one of the banks reported that it could borrow three-month LIBOR at 87 basis points less than the benchmark rate for credit default insurance bought on the bank's borrowings. What does this mean?

Well, let me start by saying that Credit-Default Swap spreads are seen as a measure of the risk of default. So if Bank A wanted to lend money to Bank B and cover itself for the risk of Bank B defaulting: Bank A would earn interest from Bank B, and buy protection from an insurer by paying an insurance premium (being the credit-default swap spread). In order for Bank A to make a profit, the interest rate would have to be higher than the credit-default swap spread. If the interest charged is lower, then Bank A is accepting that it makes a loss. As is illustrated below:

So when the bank in question tells the BBA that it expects to be able to borrow at a rate below its credit default spread, that means that it can approach a lender who will willingly take a loss. Likely? I think not. The article was published by the Wall Street Journal (Link: Study Casts Doubt on Key Rate).

Despite this, the Europeans and the IMF loudly declared that the allegations seemed baseless. Which must have been fairly expedient at the time - the world's financial markets were mid-reeling from the collapse of Lehman Brothers and such.

And in the turmoil that followed, it seemed that things were forgotten. At least, by the news reporters.

And Now

In the last few months, however, the Antitrust criminal investigation has gained greater steam. UBS has been granted conditional immunity by the US and the Swiss after agreeing to co-operate (this is the technical definition of "selling up the river"). And there are many lawsuits being lodged by angry investors (obviously), who are being denied access to documents until the Department of Justice wraps up its criminal investigation.

And thus, in the sacred halls of big banks, Antitrust is revealed to be Antichrist.

And if we extend the story any further, Antitrust will reign for a period of time, and then the Son of Goldman will ride in on his White(HouseLobbyist) Steed and establish His reign for 1000 years (because time is money, after all).

I'm calling it. The criminal probe will end in a civil lawsuit that the banks will settle and not have to admit to having done anything wrong.

And then the Chinese will take over, institute the Middle Kingdom of Heaven, and this will all be largely irrelevant.

Daily News Roundup 2012: Tuesday 20 March

Good morning

The headlines:

1. Today is the day after March 19th: the ISDA of March (four days after the ides of March - historians, take note). The credit-default swap option auction took place. Dealers agreed to a final value for Greek Bonds of 21.5% of face value at auction. This means that the CDS sellers will have to pay out 78.5% of face value. And Bloomberg is still calling it a $2.5 billion loss (albeit with slightly more covering-of-respective-asses with the data source referencing). Whatever. That amount is yet to be quantified - which it will be, by the quarterly announcements of bank earnings. But on a slightly more positive note, the administrators of the auction indicated that the 21.5% face value was in line with the market values that the bonds were trading at before they went into default. These bonds have just been swapped for bonds worth 31.5% of face-value. That sounds like almost a 50% return. Cheers to the risk-takers: return on investment AND a swap settlement? Someone is back to getting his bonus. Like a boss. Link: CDS Auction and the dodgy math.
2. Ben Bernanke is returning to his Academic Roots to justify the existence of the Fed. For those who haven't been paying too much attention to the Republican nomination process (which has been a lot of tedious name-calling and many "victory upsets", as the journalistic catch-phrase goes), Ron Paul (one of the lesser candidates) has been advocating the abolishment of the Fed. The argument is quite interesting - and is the epitome of the Austrian Economic viewpoint (as opposed to, say, the Keynesian Economic Viewpoint) on Monetary Policy. The argument is basically that the free market can handle itself, and Central Banks cock it up. Fiat money (or paper/electronic money unbacked by gold) is the great evil. And if the Central Bank were not there, the market would naturally gravitate toward a self-imposed Gold Standard (I think it would - if everyone had the right to print money, then we would quickly begin to accept only the forms of money that are most reliable, which would likely be those forms that are backed by professional reputation and some form of real asset). The counter-argument is that the Central Bank has an established professional reputation (albeit "by law"), and let's ignore the part about real assets. I'm trying not to live on the fringe of economic thought. But I quite like the Austrians. Link: Bernanke's Publicity Drive.
3. Australia has passed Julia Gillard's Mineral Resources Rent Tax, which is basically a 30% tax on Iron ore and Coal Mining. The proposal will allow the current government to lower the general corporate tax rate from 30% to 29%. My question was: if the corporate tax rate was already at 30%, how is this affecting anything? My google/wikipedia search was fruitless. And then someone pointed out to me that the tax is over and above corporate tax. That is: the government calculates an reasonable profit that a normal company would make (a normal profit); and then considers anything above that "supernormal" profit. It's those profits (which are already after tax), which are then re-taxed under the new proposal. Link: Australia's Controversial Mining Tax.
4. And the African Business News in brief. Link: ABN Briefs. The highlights:
• Several East African countries are reportedly sitting on large supplies of sugar after over-importing last year. They are now looking to move it.
• Libya's LAP Green Networks is suing the Zambian Government for seizing its 75% stake in the country's only fixed line operator. The sale took place under the previous government. When the current government took power, the sale was ruled illegal and the shares confiscated. Not sure where the money went though.
• Zimbabwe has ordered foreign mining firms to deposit their export proceeds in local Zimbabwean banks. Sigh. It's all so distressingly familiar.

And that's all for now.

Have a great Tuesday!

Daily News Roundup: Monday 19 March

Good morning

The headlines:

1. For a while now, there has been a lot of talk about Chinese home prices and a "hard landing". The IMF's Zhu Min (a deputy managing director) emerged over the weekend to tell everyone that China is heading for a "soft landing". "Even as government data showed property prices falling in most of the nation's biggest cities". And sometimes, I think that these news pieces haven't yet been translated from the original mandarin, because I'm regularly left so awkwardly confused. So to start: the property prices. The Chinese government has been running a 2 year campaign to reduce the price of housing (Premier Jin Bao says that current prices are "far from reasonable"). This has been done by dampening demand (higher down-payments required on mortgages and purchase restrictions); and by instituting low-cost housing construction projects. In the grand scheme of things - these restrictive policies will restrict economic growth. Which leads to the concept of a "hard landing" - from what I can tell, this would be a sudden and dramatic economic retraction (eg. growth rates dropping from 8.9% down to zero, or something like that). Jargon. Oi vey. Link: China's Home Prices Fall.
2. Last week, the Fed approved Goldman Sach's plan to increase its dividend and repurchase shares. This decision has been criticised, with former regulator Sheila Bair pointing out that no distribution should be approved that would bring a bank's leverage ratio below 4%. Currently, the Federal limit is 3%. A leverage ratio of 4% means that the bank's liabilities exceed its capital reserves by 25 to 1. In the event of a crisis, this would almost certainly result in a bank run. Goldman Sachs (as well as Morgan Stanley) were in the same leverage ratio range as Citigroup (who failed the stress tests); but the capital plans of GS and MS were both approved. Link: Goldman should be barred from returning capital.
3. UPS has agreed to purchase TNT express. Or, rather, TNT has agreed to be purchased - at 9.5 euros per share, this values TNT at around $6.9 billion. The deal gives UPS a much better foothold in Europe - making it roughly around the same size as its competitors. So prepare for more amazon deliveries right to your European door. Link: UPS and TNT.
4. The Africa Business News in brief. Link: ABN Briefs. The highlights:
• Kenya has opened up 8 new offshore oil blocks for leasing to exploration firms.
• Rwanda's Central Bank has kept its key lending rate unchanged at 7%.
• South Africa has conditionally approved of Glencore's takeover of Optimum Coal (a $1.3 billion transaction).

That's all for now.

Have a great Monday!

Daily News Roundup 2012: Friday 16 March

Good morning

The headlines:

1. Today, the iPad 3 goes on sale. Should I say that it started going on sale today? As the timezones clicked over, so the Apple stores across the East have started opening. Typically, there are the crazies who have been queueing in a Harry-Potter-esque type fashion since March 14 ("I just want to be the first to own one in Japan"). Or the guy who's been waiting for four days in Australia, with changes of clothing and permission to use the iStore's bathroom. Link: the iPad's Sydney debut. That's some serious dedication. They should make a movie about the iPad. Hurry iPadder and the Australian's Stoned. While I'm at it, I'm also celebrating this article, which opened with the line: "Today is International Wait In Line For Your New iPad Day, an annual rite of spring for thousands of urban American hipsters and an official holiday in many regions of the Internet. It will not, however, be celebrated in China". 
2. China's Corporate Espionage. It's knocking the wind out of US companies. But mostly, you should read this article because it reads like a James Patterson novel. And it has the line "The company's stock chart looks like the electrocardiogram of a person rushing toward white light". Brilliant. Link: The Unfortunately Common Case of AMSC and Sinovel.
3. The love affair between Warren Buffett and Jamie Dimon (CEO of JPMorgan Chase) continues, with Jamie apparently praising Warren for Berkshire's compensation policies. Mr Buffett may only accept a salary of $100,000 per year - but his employees receive substantially more than that. Bonuses where bonuses are due. Except that, when you read the article, what was actually happening is the Jamie D was being criticised for the size of his pay package. His retort was "I bet you that WB pays more than we do". Praise? Hmmm. Link: Buffett awards Wall Street-sized pay.
4. And the Africa Business News in brief. Link:
• Africa Finance Corporate (a Nigerian Investment Bank) is to partner with Zambia's Copperbelt Energy Corporation in the financing and development of six new hydroelectric power stations worth over $1 billion.
• Zimbabwe's headline CPI was 4.3% year-on-year in February. Practically unchanged.
• Botswana's headline CPI slowed to 8.2% year-on-year in February. 
• Tanzania's dipped to 19.4%.
• Impala Platinum has come out to say that the Zimbabwean government must pay for its 31% stake. This after Tendai Biti told everyone yesterday that the Zim government was going to have to close its doors as it's running out of money. Awkward. But who's willing to bet that the Zimbabwean Government retaliates by just taking over Zimplats? I mean - it's not like property rights have stopped it before.
• Ecobank is expanding again. That bank is giant.

That's all for now.

Have a great Friday.

Daily News Roundup 2012: Thursday 15 March

Good morning

The headlines:

1. So, the really big news that's been rocking Goldman's world: The Astonishing Case of the Former Executive and the "toxic and destructive" culture of Goldman Sachs. If anyone hasn't read it, you should (Link: The Letter). The GS folk are laying it on thick with the "sour grapes" line. However, can I just point out that Goldman Sachs doesn't hire just anyone? They hire the best, the most desperate, the most keen, the most likely to be brainwashed into the Bank's way of doing things. Not the type that generally emerge after 12 years of employment with a broad and public condemnation of the Bank's culture. And I will say this about Greg Smith - the gentleman is articulate. And the letter has many tones (disappointment, nostalgia, so forth), but bitterness doesn't really seem to be one of them. In any case, he's South African. Instant win. Typically, Greg Smith has attracted criticism (along the lines of "clearly, he's made enough money that he's not worried about never working in financial services again"). Link: The Critics. And Goldman lost $2.15 billion of market value. Greg Smith: LIKE A BOSS! Link: Goldman loses 3.4% of Market Value.
2. The results of the Fed's stress tests are out, and 15 of the 19 institutions passed. Basically, the stress testings establish whether the banks have enough capital (or are "suitably capitalised") to withstand serious economic downturns. Citigroup failed. So did some insurers (who complain bitterly that their business model is different to that of a bank - and therefore their capitalisation tests should be set differently). Either way, the real scandal is that JPMorgan Chase announced a dividend hike at almost the same time, throwing the market into chaos (because Bloomberg tells me so). There is a Fed rule about these announcements and how they shouldn't coincide - something about maintaining order in the market - and it seems that there was a "misunderstanding". Someone's going to get fired. For sure. Link: Banks under stress.
3. According to JPMorgan, China is already in the much-feared "hard landing". There are many analysts that disagree. But the figures that have been pointing in that direction for some time. Link: Chinese economy: landing hard.
4. In an awkward moment, the US may have to impose sanctions on India for failing to cut back on its purchases of Iranian oil. According to a recently passed law, if India doesn't cut back on its Iranian oil purchases, any Indian bank processing oil payments through the Iran Central Bank may be barred access to the US Banking System. Link: The US sanction on India over Iran.
5. And the Africa Business News in brief. Link:
• Burundi has predicted that its 2012/13 crop will be around a 107% increase on last season's.
• Kenya has increased the price of petrol and kerosene, but dropped the price of diesel. 
• Zimbabwean Finance Minister Tendai Biti says that the Government will have to close due to low revenues, if the diamond inflows don't deliver. This makes sense. They can't borrow. They can't tax too well. And they can't print money. Awkward.
• Impala Platinum has caved and handed over 51% ownership in Zimplats to indigenous parties (Bloomberg Article Link: The Forced Hand of Implats).

That's all for now.

Have a great Thursday.

Daily News Roundup 2012: Wednesday 14 March

Good morning

The headlines:

1. A US Government report has shown a 1.1% increase in retail sales for February (equivalent to around 13% per annum). Despite this improvement in retail sales, and the recent improvement in employment figures, the Fed announced that it will not be tightening monetary policy at this time. The question really is: how sustainable are these increases in retail spending? It forms part of that economic myth of everyone wanting higher sales, higher employment, lower inflation, etc. But in the end - it has to stop somewhere. Basic rule number 1: limited resources. There is a limit. An equation. A balance. You can't have it all because that's just life. Link: Fed's policy unchanged despite improvements in economic outlook.
2. Despite political pressure to continue purchasing government debt issues, the Bank of Japan announced yesterday that it will be expanding its low-cost loan facilities to Japanese industry instead. This is the choice between short-term policy (adding liquidity to the market immediately) and long-term policy (low-cost loans improving capital infrastructure and leading to long-term growth). The move is seen as the Bank of Japan's attempt to distance itself from political pressure, following their purchase of US $121 billion worth of government bonds on February 14. Further bond purchases are not off the table, however, according to Governer Masaaki Shirakawa. Link: BOJ resistance to political pressure.
3. This article by Carmen M. Reinhart is worth a read: Financial Repression is here to stay. It gives a great historical perspective to dealing with overburdened government debt. 
4. There is an editorial about the avoidance of the Credit-Default Swap Time Bomb. Following on from my blog post yesterday, I continue to be amazed by the play on numbers. The article talks about the $32 trillion CDS market (a figure straight off the website of the Bank of International Settlements - and it's a net figure), and follows it with the $3.2 billion Greek CDS exposure (a net exposure figure straight off the website of the Depository Trust and Clearing Commission's website). If we're to accept their point, it would be saying that Greek CDS instruments comprise 0.0001% of the CDS market. What - has everyone just been blind? Or maybe it's too late to buy insurance when the house is on fire... Link: CDS Time Bomb.
5. And the Africa Business News in brief. Link: ABN Briefs. The highlights:
• Mozambique's Central Bank has cut rates by 125 basis points to increase private sector lending.
• Nigeria's fuel regulator has issued fuel import contracts for the second quarter for 4.8 billion litres of gasoline. These contracts have been allocated to 42 marketers.

That's all for now.

Have a great Wednesday.

Greek CDS Exposure: Proving the ISDA and Bloomberg Wrong

According to numerous news reports, the net exposure arising as a result of Friday’s decision to declare the activation of Greek CACs a credit-default event amounts to approximately $3.16 billion (assuming that the bonds achieve no value at the ISDA auction on March 19).

Where is the data coming from?

On the same day that the ruling announcement was made, the ISDA issued a FAQ document relating to the Greek Sovereign CDS credit event. Both these documents can be downloaded at http://www2.isda.org/greek-sovereign-cds/. This document makes reference to the $3.16 billion net notional as disclosed by the DTCC (The Depository Trust and Clearing Corporation). In fact, the publication erroneously links to Table 5 of the DTCC data – the actual figure is found in Table 6. Link: http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=6. Table 6 discloses the Top 1000 Reference entities for the swap arrangements (ie. the issuers of the instruments being covered by the credit default swaps). Under the heading “Hellenic Republic”, the sovereign debt gross notional is disclosed as $68,901,331,331; and the net notional is disclosed as $3,162,579,257.

What is the problem that people are having/should be having?

The problem appears to be twofold:

1. The preliminary list of bonds submitted to the ISDA for restructuring credit event consideration included issuers other than the Hellenic Republic. 
2. Is the sovereign debt exposure figure presented by the DTCC a fair reflection of economic reality? 

Problem 1: The Other Issuers on the Preliminary List

From my reading of the ISDA public announcements, the problem is as follows:

1. The preliminary list of bonds submitted for review (released by the ISDA on March 7 – this can also be downloaded from the link identified above) includes issuers other than the Hellenic Republic. No basis for the inclusion is given, nor is it required. The list is not final – rather, these are the bonds that the public has asked the ISDA to consider. 
2. It is suggested that the reason for inclusion is on the basis that many of these issues have guarantees issued by the Hellenic Republic. Given that the trigger event was the activation of CACs, one could infer that the default will only extend to those bond issues where CACs have been retroactively imposed (ie. only Sovereign Debt). 
3. The ISDA has not identified the bond issues to be affected by the default announcement: the wording is specific to the occurrence of a Restructuring Credit Event. 
4. According to the announcement, the EMEA Determinations Committee is currently in the process of reviewing the preliminary list of submitted bonds. 
5. Therefore, the magnitude of the default event will only be set after the EMEA DC formally identifies the bonds affected. 

Can impact of the other issuers be quantified?

The issuers identified in the preliminary list of submitted bonds are:

1. The Hellenic Republic 
2. Athens Urban Transportation Organisation (OASA) 
3. Attica Bank S.A. 
4. EFG Eurobank Ergasias S.A. 
5. Hellenic Railways (OSE – Organismos Sidirodromon Ellados) 
6. National Bank of Greece S.A. 
7. New Economy Development Fund S.A. (Taneo) 
8. Proton Bank S.A. 
9. Aeolos S.A. 
10. Ariadne S.A. 
11. Agricultural Bank of Greece S.A. 
12. Alpha Bank AE 
13. Piraeus Bank S.A. 

According to Mark J. Grant in his article “The Eight Hundred Pound Greek Gorilla Enters The Room” (link: http://www.zerohedge.com/news/eight-hundred-pound-greek-gorilla-enters-room) – these other bond issues are going to increase the CDS impact number up to $79 billion.

I’m not sure where that number comes from, but I’m going to assume (for this section) that the DTCC figures are correct. If they are, then with the exception of the Hellenic Republic, none of the above issuers feature in the Table 6 Top 1000 reference entities. The smallest of the Top 1000 (by net notional exposure) is Nextel Communications, with a Gross Notional of $1,649,302,354 and a Net Notional of $105,475,330. By inference, therefore, the maximum additional net notional exposure to be added by the other 12 entities identified is an extra $1.3 billion ($105 million by 12).

However, as I have previously stated, this is unlikely to be a real consideration as the triggering event is the activation of the Collective Action Clauses – an event which should have no direct default impact on government guarantees given to state-owned entity and domestic bank issues.

Problem 2: Is the DTCC’s calculation correct?
Renowned investor Jim Sinclair (JS) in an interview with King World News suggests that the real question to be asked should be: is the amount calculated by the DTCC correct? He says that the DTCC amounts calculated are only in respect of transactions taking place within the US (ie. they exclude foreign bank transactions, as well as transactions undertaken by the foreign subsidiaries of US banks). If that were the case, then we would have to look for the real information in the data presented by the Bank of International Settlements (BIS).

The latest data available from the BIS takes us up to June 2011. According to Jim Sinclair, the total CDS market approximates $37 trillion, of which over 50% must relate to Greek debt. The first figure is supposedly drawn from BIS statistics; the second is based on his 50 years of market experience.

Well, the first figure is factually incorrect (or perhaps chronologically incorrect – it’s always possible that the number referred to a different point in time). At the end of June 2011, the total outstanding CDS market, according to BIS, was $32.4 trillion (net exposure).

As regards the second, the BIS gives a breakdown of the CDS market based on reference entity sector. Of the $32.4 trillion, only $2.9 trillion actually relates to Sovereign Debt. The only other potential impact is in the sector of the CDS market held over CDO instruments, which may or may not include Greek sovereign debt issuances in default. This sector of the market constitutes a net notional $0.9 trillion. So in total: a potential exposure of $3.8 trillion.

Obviously, this is significantly larger than the $3.16 billion being used by the ISDA (over 1000 times larger). And Jim Sinclair does make a good point: the DTCC tagline for its data is that “this section provides comprehensive reports on the vast majority of CDS contracts registered in the Warehouse’s global repository” (link: http://www.dtcc.com/products/derivserv/data/index.php). Obviously, CDS contracts that are not registered with the DTCC would not be included in this data. And it certainly sounds like the DTCC captures only the US portion of the market.

As a reasonability check, compare the total of the Table 6 Top 1000 reference entities to that of the total CDS market according to the BIS figures. The total net exposure of the DTCC Top 1000 is only $1.1 trillion, compared to the $32.4 trillion of the BIS. If we say that the DTCC figures approximate the BIS figures, the balance of $31.3 trillion must then be made in reference to other issuers. Given that the Top 1000 include governments and all major corporate and parastatal bond issuers – this implies that the majority of the CDS market has been taken out against small issuers! Highly unlikely.

As a final check, one should consider what the figure of $3.16billion is implying about the global debt market. I have used Table 15B of the BIS quarterly statistics (link: http://www.bis.org/publ/qtrpdf/r_qa1203.pdf), which breaks down the Total International Bonds and Notes by nationality of issuer. Whilst this statistic uses total international bonds and notes outstanding rather than just sovereign debt, or a combination of both international and domestic debt: the point is to illustrate the proportion of the international debt market that is made up by Greek debt. 

Total International Bonds and Notes Outstanding (in US billions)
Greece	397.40
The World	27 819.70
Proportion represented by Greece	1.43%
Total CDS Net Notional Exposure (in US Billions)
CDS Net Notional Exposure (DTCC)	3.16
World Net Notional Exposure (Sovereign Debt) - from BIS	2 907.80
Proportion represented by Greece	0.11%

If we just assume that all investors were blind and equally distributed their CDS investments between countries, we would expect Greece’s net notional exposure to approximate its portion of the debt market. Even more so, we would have expected investors to flock to CDS instruments over Greek sovereign debt, given the economic fundamentals of Greece’s position (ie. you’re much more likely to buy insurance when your house is made of untreated wood and situated next to a blacksmith, than if your house is made of stone). Instead, the ISDA (and Bloomberg) would have us believe the opposite, that investors underweighted their CDS exposure to Greek sovereign debt.

Is there a reasonable explanation for underweighting?

I think that there is an argument to be made here. After all, why has a Greek default been delayed for so long? A year ago (even 6 months ago), the Euro leaders were all against causing a credit-restructuring event for fear of triggering CDS instruments and causing contagion. And now suddenly, everyone is keen for a default. Including Greece, who elected to action the CACs to top up the extra 14% of the debt – where they could have just restructured the 86% voluntary portion and gotten away with it. So the question is: why now?

I think that the delay has accomplished two things:

1. If I were speculating on Greek sovereign debt defaults three or four years ago (back when CDS instruments were cheap), I would have purchased CDS instruments over the debts issues that were falling due in the short-term – as these would have been much more likely to default (as their repayments would have fallen due sooner). By stretching out the time to default, some of the original CDS instruments will have lapsed, as Greece has managed to meet its debt obligations up and until this point; albeit with the assistance of the first bailout. And in the interim, as the market realised the Greek crisis, the spreads on Greek Sovereign CDS widened making it almost prohibitively expensive (and therefore unprofitable) to purchase more CDS instruments. Greece and the Eurozone may have faked it until they made it. 
2. The delay also gave the major banks the chance to recapitalise in anticipation of a default, and to rebalance their positions.

So perhaps the ratios sound about right.

Conclusion
Either way, the $3.16 billion figure is wrong. If anything, it is only the lower end of the range. What we can say is that there is definitely $3.16 billion of net exposure – but that it seems to only represent the US exposure. The rest of the world’s net exposure is floating somewhere in the $2.9 trillion of the BIS statistics.

Daily News Roundup 2012: Tuesday 13 March

Good morning

The headlines:

1. In the more boring segment, the EU Finance Ministers are meeting this week to approve the Greek bailout package payment. Is that their official job description? "Hi, my Name is Eufin Anceminister, and I approve Greek bailouts"? Because that's all they seem to do. They must have good snacks. It makes me wonder if every week a new country takes a turn. And if they tell Poland to skip it because no one likes pickled herring. In any case - they're meeting now because Greece has met the debt swap requirement. Link: Greek bailout package to be approved.
2. The US is taking China to World (Trade Organisation) court over Rare Earth metals. They join Japan and the EU in feeling that China is being uncompetitive about their exports of Rare Earths ("Rare Earths" are the collective term for "17 chemically similar metallic elements used in making batteries, electric cars and wind turbines"). According to the US Geological Survey, China accounts for 95% of the global supply of rare earths. When China imposed an export quota on these metals in 2010, prices soared. Hence the complaint. The only real question in my mind is whether China is the global supplier because of its Chinese mines in China; or because of its Chinese mines in the rest of the world (ie. Africa). Link: US fights with China over minerals.
3. And in other suing news, Yahoo is suing Facebook for some kind of infringement. Like Yahoo sued Google (or, at least, their California-based entity Mountain View). Google settled the case by offering stock. Is this how Yahoo plans to survive? Link: Yahoo accuses Facebook of advertising-related infringement.
4. China's Money Market Rate has increased significantly after the Central Reserve Bank almost doubled the sale of repurchase contracts from a week ago. This is in an effort to drain liquidity from the market. Why? Around 254 billion yuan of Central Bank bills and repurchase agreements mature this month (compared to 12 billion worth in February). That's a lot of money to enter the market at once: so the CCB sells repurchase agreements to soak up the extra cash. Link: China's money market rate increases.
5. And more LIBOR pessimism, as investors call for an overhaul of how it's determined. Link: LIBOR: less guessing and more verifying.
6. And the Africa Business News in brief. Link: ABN Briefs. The highlights:
• Ethiopia's year-on-year inflation is up to 36.3% in February. Many countries in East Africa are suffering from double-digit inflation on the back of poor rainfall, low harvests and surging oil prices.
• The African Development Bank has granted Kenya a loan of 21.8 billion shillings for the construction of roads and energy projects.
• Anadarko Petroleum has announced that its first flow test offshore Mozambique has confirmed the deliverability of the reservoir.

That's all for now.

Have a great Tuesday.

Daily News Roundup 2012: Monday 12 March

Good morning

The headlines:

1. The Greece deal will trigger Credit-Default Swaps, according to the ISDA (International Swaps and Derivatives Association). Contrary to popular (read: "my") belief (read: "erroneous understanding"), the Greek government was going to use the CACs regardless. I get the impression that Greece needed the 75% participation in order to activate the CACs for the remaining balance - but this seems to be a misunderstanding as well. So in conclusion - the reasons aren't clear, but there was 85% participation, and then Greece used the CACs to bring participation up to 95%, and the CDSs were therefore triggered. The ISDA will now expedite an auction on 19 March to settle the $3 billion or so worth of contracts (normally, this auction would take place a month later). Now - the auction is very interesting. Basically - the CDS seller must pay the CDS owner out when a bond defaults; and that payment should be the difference between the face value of the bond and the market value of the bond at the date of settlement. How do you get the market value of the bond? You hold an auction for the bonds that are going into default. Link: Greece Deal Triggers Default Swaps.
2. On Friday, China's customs bureau reported China's trade deficit for February was the country's largest since 1998. The shortfall of $31.5 billion was created by a 39.6% increase in imports against only an 18.4% increase in exports. This creates pressure on the Chinese government to implement policies that promote growth, especially after last week's reduction in China's target growth rate. It's possible that the quantitative easing measures that the China Central Bank has been implementing will become more direct that just adjustments to reserve requirements. On the other hand, the higher imports over lower exports does suggest that China is building its stockpiles of inventories, as I mentioned last week when China's manufacturing indicators showed increases in production. The real question is whether China can actually stimulate real economic growth internally if the key problem is that its external consumer demand base is going through an economic contraction. To me - it seems that China's solution is quantitative easing in the US and the Eurozone, not within China itself. But it's just a thought. Link: China's trade deficit.
3. Wal-Mart has won the SA Lawsuit contesting its purchase of Massmart. The Competition Appeal Court in Cape Town stated that there was insufficient evidence to support the view that the Massmart purchase would be detrimental to the public. Link: Wal-mart Win.
4. And the Africa Business News in brief. Link: ABN Briefs. The highlights:
• The Ugandan Central Bank intervened to prevent a fall in the shilling after the Central Bank's interest rate cut announcement.
• South Africa has won a tender for one of the world's largest nuclear power deals.

That's all for now.

Have a great Monday.