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A critical task for the Greek economy enters a new phase

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OF THE €57.7bn ($68.2bn) of loans that Piraeus Bank, one of Greece’s four dominant lenders, had on its books at the end of March, €20.5bn were more than 90 days overdue. A further €11.7bn were also deemed unlikely to be repaid. In all, at the end of 2017 Greek banks carried €95.7bn of such non-performing exposures (NPEs)—at 43.1% of loans, the heaviest burden in Europe. Still, the pile was €13bn smaller than at its peak in March 2016. The banks plan to reduce it by €30bn this year and next.

Dealing with bad loans to business—around 60% of NPEs, mostly to small firms—is the most daunting part of this monumental job. It means resetting the balance-sheet of much of Greece’s economy, from restaurants to manufacturing. But a new phase of this task is under way, with the first sale of secured commercial loans. On May 29th Piraeus said it had agreed to sell Amoeba, a €1.45bn bundle of loans to around 180 borrowers, to Bain Capital Credit, which has previously bought bad debts in Italy and Spain. The collateral, comprising about 1,700 properties, is mainly in big cities. Other banks have been watching keenly. Alpha Bank, another of the four big banks, is weighing a similar sale. Bankers and investors say Amoeba has helpfully spawned an eco-system of buyers and advisers.

Clearing away the NPE rubble and renewing lending are both vital. GDP shrivelled by a quarter in 2010-13 and then stagnated for three more years. Though it is growing once more, at 1.4% in 2017 and maybe 2% in 2018, it is scarcely roaring back. Write-offs and sales have accounted for most of the reduction in NPEs, though “cures” (as borrowers return to health or simply find the cash) have ticked up too. Sales have mainly been of unsecured consumer debt, for a few cents on the euro. In October Eurobank, another leading lender, sold a €1.5bn portfolio to Intrum, a Swedish specialist, for about €40m. In March Alpha shed €3.7bn of loans to Norwegian-owned B2Kapital Greece for €90m.

Selling business loans is harder. Though provisions already cover half of NPEs, and collateral notionally covers the rest, banks and loan-buyers must still discern which chronically indebted businesses are viable and which not, and what collateral is truly worth. Debtors may owe money to more than one bank, and different parts of a property (parking space, storage areas) may have been pledged separately. Bankers reckon that 25% of defaulters are “strategic”—that is, they can pay but won’t, believing foreclosure will never come.

Lately online public auctions of foreclosed commercial and residential properties have also begun. Up to 20,000 pieces may go under the e-hammer this year. Banks are buying a high proportion themselves—at Piraeus, 80%—but at least sales are happening. Protests prevented physical auctions last year. E-auctions have smoked out some strategic defaulters: perhaps a fifth of properties put up for sale have been pulled when borrowers found the money or asked to restructure the debt.

At the top of the scale Pillarstone, a turn-around specialist owned by KKR, a private-equity giant, is taking on a few large, troubled companies. It is overhauling Famar, a drugmaker, and is close to deals with Alpha and Eurobank to reshape Notos, a department-store chain, and Kallimanis, a frozen-seafood firm. Banks have also set up a forum to tackle companies owing money to more than one lender.

Among other positive signs, all four banks boast healthy capital ratios and came through stress tests by the European Central Bank (ECB) this month without being required to raise more equity. They should soon be weaned off ECB emergency funding, which by April was down to €10.2bn, from €86.7bn in mid-2015. Deposits that gushed out in the crisis have begun to flow back.

Yet much of the masonry is far from firm. Leonidas Fragkiadakis, chief executive of National Bank of Greece, the other big bank, resigned on the eve of the stress tests, having fallen out with his board. Private-sector deposits, at €120bn, are still 45% lower than at the end of 2009. Tens of billions are stashed in homes—even buried in gardens—or abroad.

Despite changes in the law intended to speed up bankruptcies, procedures are still “a mess”, believes Stathis Potamitis of PotamitisVekris, a law firm in Athens. The statute is too complicated for small firms, he says. Many new “out of court” workouts will in fact require judges’ rulings because the state, often the biggest creditor, will object to banks’ plans. And Greece lacks specialised courts: a judge can rule on a divorce one day and a foreclosure the next. Last year, according to Creditreform, a debt-collection group, Greece saw just 120 company insolvencies. Similarly-sized Portugal had over 6,000.

The terms of Greece’s graduation from its third bail-out programme, due in August, also matter. Yannis Stournaras, the central bank’s governor, argues that the government should ask for a precautionary credit line from the European Stability Mechanism, as insurance against a sharp rise in borrowing costs (which would feed through to banks). The left-wing government vehemently disagrees, preferring to rely on building a cash reserve.

Even if banks fulfil their plans, they will still have €65bn of NPEs—a ratio of 35%—at the end of 2019. Theodore Kalantonis, the head of Eurobank’s troubled-assets division, says the “biggest question” is how lenders will come up with a new plan after that, to bring NPEs closer to the European average. “Can we do it? The answer has to be yes. But it will not be easy.”

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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