Financial Times Newsmine - Financial 6/24

Financial

On Greece and the credit default swap market, June 24

"The overall net pay-out the market will have to make on Greece in the case of a credit event, which will be decided by a committee that meets under the auspices of the International Swaps and Derivatives Association (Isda), is only $5bn. But this may not truly reflect the size of potential losses for some banks. The gross CDS exposure on Greece is $79bn and some analysts speculate that any one bank may have to pay out as much as $25bn. Just as critically, say some strategists, a decision against a credit event may call into question the intrinsic value of buying CDS as a hedge against default, bringing the relatively nascent sovereign CDS market to a standstill."

On the Carlyle Group IPO, June 24

"Carlyle, the private equity firm with $108bn under management, plans to raise more than $1bn with a initial public offering of stock but is likely to come to the market with a lower-than-expected valuation, according to bankers familiar with the matter."
"Carlyle had hoped to be valued at almost 10 times its 'economic net income', a metric that excludes costs associated with the listing, they said. Now, Carlyle can expect a multiple of about seven times unless market conditions improve, they added."

On the high-yield bond market, June 23

"Mutual and exchange trade funds that buy high-yield or junk bonds, which are defined as debt with credit ratings below investment grade, last week saw net outflows of $1.6bn, the biggest weekly withdrawal by investors for these funds in more than a year, according to Lipper."
"The outflows came in a volatile week, with fears about a possible default by Greece weighing on investors. Also, they followed the biggest month of new sales worldwide for this market and a new record low for average junk bond yields below 7 per cent in May."

On Europe's equity market, June 23

"European stock markets are, by some measures, the cheapest in the world. But, far from attracting investors, it seems to be putting them off. Investors have pulled money out of European equity funds for six consecutive weeks, the longest streak of net withdrawals since the start of 2009, according to EPFR Global, a data provider. The Greek debt crisis provides much of the reason why. The Stoxx Europe 600, which tracks the fortunes of Europe’s 600 biggest companies, has declined for seven straight weeks, its worst run since the turn of 2007-08. It hit a three-month low last week and is down 2.6 per cent this year."

Martin Wolf on Greece, June 22

"The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it. The country seems too uncompetitive for that. A default is a necessary, but not a sufficient, condition for a return to economic health."
"Greek performance under the programme agreed with the International Monetary Fund in May 2010 has been quite impressive. But it has also failed to return the country to solvency. The spread between Greek and German 10-year bonds has gone from 460 basis points (4.6 percentage points) after the programme was announced to 1,460 basis points. Much the same has happened to Ireland and Portugal. More dangerously still, even Spanish spreads have reached 270 basis points (see chart). Greece, Ireland and Portugal have no chance of being able to borrow in the markets at rates they can afford in the foreseeable future."

Peter Tasker on emerging markets and the equitisation ratio, June 22

"How much more 'emerging' have the emerging markets left to do? Probably not much, given the vast amount of capital and hope invested in the asset class already. The extraordinary scale of what has occurred is evident from the equitisation ratio – a broad-brush indicator of financial development that measures the market capitalisation of a country’s stock market in relation to its gross domestic product. According to Warren Buffett, this ratio is 'probably the best single measure of where valuations stand at any given moment'".
"In a stunning reversal of fortune it is the slow-growth mature economies that now have the low equitisation ratios. Germany, which generates real gross domestic product per capita of $37,000, has an equitisation ratio of 47 per cent, whereas the Philippines, with a per capita GDP of just $3,700, sports a ratio of 66 per cent. Likewise, Japan is now less equitised (63 per cent, on GDP per capita of $34,000) than Peru (75 per cent, on GDP per capita of $9,000)."
"China has been central to the emerging markets boom, yet four years of bear markets have left its own equitisation ratio at a subdued 62 per cent – well down on the 140 per cent which marked the Shanghai market’s peak in 2007. Instead it is the countries that satisfy China’s ravenous appetite for resources that have seen their stock markets continue to balloon. Malaysia, Canada and Australia all have equitisation ratios north of 130 per cent. Chile, with a stock market worth 185 per cent of its GDP, is in a class of its own."

On unsecured bank borrowing, June 22

"The ratio of senior unsecured debt issuance – the mainstay of bank funding – to secured borrowing, in the form of asset-backed securities and covered bonds, is at its lowest this month since July 2007, according to data from Dealogic. Senior unsecured borrowing is worth just over half the funds raised through secured bonds so far this month, compared with an average monthly ratio of 1.3 times."