Tuesday, October 25, 2011

Financial Review 2011 Q3: Spreading Crisis

This article is basically an extension to our previous articles: Financial Review 2011 Q2: Crisis Recurred and also Financial Review 2011 Q1: Rising Inflation Concerns The below table describes the key events in business and financial news for the third quarter (Q3: July to September) in this year 2011:

July 1:Russia resumed grain exports since the historic drought in August 2010.
July 2:EU (European Union) finance ministers approved to release its 5th installment of bailout fund (worth EUR 8.7 billion) for Greece, after Greece parliament finally voted to pass an austerity plan last month. Together with EUR 3.3 billion from IMF (International Monetary Fund), Greece would receive EUR 12 billion totally for this round of installment.
July 4:Standard & Poor's (S&P) regarded French-led proposals for Greece that involve private sector debt restructuring, debt rollover or voluntary debt exchange as a selective default.
July 5:(1) Moody's Investors Service (MIS) downgraded Portugal credit rating to junk status over rising risks for a second bailout.
(2) WTO (World Trade Organization) ruled that China export restrictions on 9 kinds of industrial raw materials were violations of WTO rules.
(3) ECB (European Central Bank) claimed it would still accept Greece government bonds as collateral unless all 4 credit rating agencies it currently uses declare Greece a default. The 4 credit rating agencies ECB uses are S&P's, Moody's, Fitch, and DBRS (Canada), in which Moody's never issue default ratings to sovereign securities and DBRS even does not give ratings to Greece government at all.
July 6:People's Bank of China (PBoC) raised interest rates again by 0.25%, the third time in this year. This matches with our earlier estimation: More Interest Rate Hikes Against Inflation in 2011.
July 7:ECB raised interest rates again by 0.25%, the 2nd time in this year.
July 11:Italy restricted short selling on the Milan stock exchange by implementing new rules that market operators need to disclose their short selling trades.
July 12:(1) Moody's downgraded Ireland credit rating to junk status on increasing risks for a second bailout.
(2) China decided to introduce "New 5 Articles" by extending its property purchasing restriction policy from the first tier to second and third tier cities. Read details at: Housing Market Bubble: Overview and Latest Development. Read also: How 'New National Eight' can cool China property market.
July 13:(1) Moody's warned the U.S. by putting its top Triple-A sovereign-debt credit rating under review for a possible downgrade.
(2) Fitch downgraded Greece sovereign-debt credit rating to CCC, just one place above default status.
July 14:S&P's (Standard & Poor's) and China Dagong rating agencies put the U.S. sovereign-debt credit rating into a negative watch list for a possible downgrade. According to a S&P's simulation study, U.S. debt rating would possibly be downgraded to junk status by 2030 if the U.S. government does not reform significantly to address its fiscal problems.
July 15:(1) EU stress test result revealed that 8 out of 91 main European banks failed.
(2) Italy parliament passed austerity measures worth over EUR 70 billion, in order to achieve its target for a balanced fiscal budget by 2014. The austerity measures included increases in retirement age, raises in healthcare fees, freezes on public-sector salaries, cuts in high-end pensions and tax breaks etc.
July 21:(1) Greece became the first-ever Euro-zone country allowed to default. In Brussels, EU and IMF approved the second bailout plan worth EUR 109 billion for Greece. The plan involved EUR 49.6 billion private sector participation (at a debt default rate of approximately 21%), in which EUR 37 billion expected from voluntary debt rollover (extend debt maturity to 15-30 years) by backing private investors with AAA-rated securities, plus EUR 12.6 billion expected from revenue in buybacks of old Greece debts at par value or discounted price from private creditors. The rest would be contributed by IMF and EFSF (European Financial Stability Facility) at a reduced annual lending rate of around 3.5% and an extended debt maturity period from 7.5 years to 15-30 years, with a grace period of 10 years. This EFSF lending conditions would apply to Portugal and Ireland as well.
(2) EU historically allowed its financing vehicle EFSF (European Financial Stability Facility), which has operated outside ECB's balance sheet but funded by bonds backed by EU, to expand its role to intervene by precautionary credits or by buying bonds in the secondary market, and to finance governments with loans to recapitalize banks if deemed necessary.
(3) International Swaps & Derivatives Association (ISDA) claimed that the Greece voluntary debt rollover plan would not trigger a credit event, and thereby Greece CDS (Credit Default Swaps) investors could not get paid to curb their losses in Greece government bonds.
(4) ECB conceded to accept Greece government bonds as collateral even if these bonds triggered temporary default, as EU would provide EUR 35 billion for insurance in case Greece collateral should fail.
July 22:(1) Fitch claimed the Greece voluntary debt rollover should constitute a Restricted Default (RD).
(2) HKMEX (Hong Kong Mercantile Exchange) started trading its second product, a USD-denominated IK troy ounces Silver futures contract. Read also: Shanghai vs HK as Leading Chinese Financial Center.
July 25:(1) China stock market stumbled as investors expected cuts in fixed asset investment after the train crash of the Wenzhou high-speed rail. You may read also: 2011 Shanghai Composite Index target and our Updated 2011 Hong Kong HSI target.
(2) Moody's downgraded Greece credit rating to Ca, just one place above junk status. Moody's also remarked that the latest EU and IMF debt exchange program implied the Greece debt default was virtually 100% certain.
July 26:(1) George Soros Quantum Fund announced to stop managing non-family client accounts by March 2012 to get around the new Dodd-Frank disclosure requirements and avoid registration under the U.S. SEC hedge funds financial regulations.
(2) CME raised margin requirement of U.S. government bonds ranging from 8% to 22% on threat of a possible default.
July 27:S&P's downgraded Greece long-term sovereign credit rating from CCC to a deeper junk status CC for a selective default.
July 28:Hong Kong issued an inflation-linked iBond, its first-ever retail bond. Read our: Bond Analysis of Hong Kong iBond.
July 29:U.S. Bureau of Economic Analysis (BEA) released its First Advance 2011 Q2 GDP Estimate as +1.3% QoQ, and cut the 2011 Q1 GDP significantly from +1.9% to +0.4% QoQ (revised). The unexpectedly weak U.S. GDP data disappointed the market with concerns over a stagnation risk.
July 31:U.S. parliament agreed to raise debt ceiling by at least USD$2.1 (up to USD$2.4 trillion), and hence planned to cut fiscal deficit by USD$917 billion in 10 years and additionally cut at least USD$1.2 trillion (up to USD$1.5 trillion if further agreement can be made).
Aug. 1:HSBC (Hong Kong and Shanghai Banking Corporation) reported that China PMI (Purchasing Managers Index) dropped to 49.3 in July, the first contraction of Chinese manufacturing sector since July 2010.
Aug. 2:(1) Bank of China (Zambia Lusaka Branch) launched the first-ever RMB note services in Africa. Read also: Chinese Bank declares RMB Business War across the World.
(2) South Korea central bank (BoK) increased its Gold reserves by buying 25 metric tons of Gold between June and July, the first time in recent 13 years.
Aug. 3:Swiss central bank intervened USD/CHF by increasing money market liquidity supply (i.e.: introducing monetary quantitative easing) against rapid Swiss Franc (CHF) appreciation. Actions to impede safe-haven monetary flows into Swiss franc included: (a) narrowing the 3-month LIBOR target range to 0%-0.25% (as close to zero as possible) from 0%-0.75%; (b) no renewal of repos and SNB (Swiss National Bank) bills that fell due and would repurchase outstanding SNB bills until the sight deposits at SNB (representing Swiss Franc monetary base) were significantly increased to CHF 80 billion from CHF 30 billion.
Aug. 4:(1) Bank of Japan (BoJ) intervened USD/JPY at 77.1 level by selling JPY 4.5 trillion directly to the forex market, the largest intervention amount ever, to fight against rapid Yen appreciation. This time BoJ still allowed no re-absorption of the extra liquidity injected into the financial system. Japan also announced to increase the size of its asset purchase program by 50% to JPY 15 trillion.
(2) ECB resumed its emergency bond-purchase program that had been suspended since March, but refused to extend the program coverage to include Italy and Spain government bonds.
(3) Turkey became the first G20 countries to start cutting interest rates in order to contain the risk of economic slow-down.
Aug. 5:U.S. historically lost its highest Triple-A credit rating since 1941 as Standard & Poor's cut the U.S. long-term sovereign-debt rating from AAA to AA+, and kept outlook as negative because S&P's considered the latest U.S. fiscal deficit reduction plan insufficient and unsustainable. Read also: New Milestone For RMB Global Circulation and Internationalization.
Aug. 7:ECB announced to actively implement its bond-purchase program against eurozone debt crisis, and finally signaled to extend the program coverage to buy Italy and Spain government bonds.
Aug. 8:(1) Greece banned stock market short-selling for 2 months.
(2) Bank of America (BoA) share price dropped by over 20% on worries about its stability as AIG filed lawsuit against the bank and claimed that BoA marketing materials described the loans behind mortgage-backed securities (MBS) bought from the bank were much safer than they should be.
Aug. 9:(1) U.S. Federal Open Market Committee (FOMC) historically set an interest rate freezing period by keeping its benchmark federal funds interest rate target range at the current record low level (0%-0.25%) until mid 2013 at least. This should encourage the market to borrow short-term money to buy longer-term government bonds.
(2) China CPI hit +6.5% in July, the highest inflation level in recent 3 years. Read also: Five Key Methods to Curb China Inflation and our Updated 2011 China CPI target.
(3) USD/CHF hit 0.707 but then dropped as media reported Swiss Franc (CHF) might peg with Euro to counter its massive overvaluation.
(4) South Korea revived ban on stock market short-selling (the first time since 2008 financial crisis) for 3 months.
Aug. 10:(1) China exports hit a historical high of USD$175.1 billion in July.
(2) China State Council decided to suspend all new high-speed rail project approval, the first time since the Wenzhou train crash on July 23, 2011.
(3) North and South Korea fired artillery shells across their tense western sea border, the first time since November last year.
Aug. 11:(1) CME Group raised Gold futures margin requirement in COMEX by 22%.
(2) Kenya, Djibouti, Somalia, Ethiopia and South Sudan in East Africa region suffered from their worst drought in 60 years with hunger crisis.
Aug. 12:Four more European countries (France, Italy, Spain and Belgium) started to ban stock market short-selling after Greece, Turkey and South Korea. The four countries temporarily banned short-selling of financial stocks for 15 days or for an undefined period.
Aug. 15:Google, the search engine giant, announced to acquire Motorola Mobility in order to compete with Apple Inc.
Aug. 17:China announced new measures to speed up engine of RMB internationalization and to re-confirm Hong Kong as offshore RMB centre. Read also: New Policies Benefiting Both HK and China.
Aug. 22:(1) Libya military rebels, supported by the North Atlantic Treaty Organization (NATO), intruded capital Tripoli.
(2) CME launched a new RMB forex futures contract, the first exchange operator to launch RMB-denominated products. Read also our: 2011 RMB Forex Rate target.
Aug. 23:Gold hit record high of USD$1900 per ounce.
Aug. 24:(1) Japan introduced a new special program (worth USD$100 billion) to combat Yen rapid appreciation by offering low interest rate loans to encourage Japanese companies to buy foreign assets.
(2) Moody's cut Japan sovereign-debt credit rating from Aa2 to Aa3.
(3) Steve Jobs, the co-founder of Apple, resigned as CEO (Chief Executive Officer) of this reputable iPods, iPads and iPhones maker.
(4) Gold fell more than USD$100 to USD$1757.3 per ounce as CME unexpectedly raised margin requirement again by 27%.
Aug. 25:(1) U.S. billionaire Warren Buffett, Chief Executive of Berkshire Hathaway, gave confidence vote to Bank of America (BoA) by investing USD$5 billion in its cumulative preferred shares, which would pay 6% annual dividend to Buffett but not count as Tier 1 capital to BoA Corp.
(2) France, Spain, Italy, Belgium and Greece extended their short-selling bans on financial-sector stocks until September 30, 2011.
Sep. 1:Brazil unexpectedly cut interest rate by 0.5%, following the previous 5 consecutive interest rate hikes. It was Brazil's first Selic rate cut since July 2009 on worries about global economic slowdown.
Sep. 2:U.S. Federal Housing Finance Agency (FHFA) filed lawsuits against 17 financial institutions including Bank of America (BoA), Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, General Electric, HSBC, Royal Bank of Scotland, Societe Generale, Barclays, Nomura and Deutsche Bank etc, over their financial misrepresentation or fraud leading to massive losses in subprime mortgage securities invested by the mortgage giants Fannie Mae and Freddie Mac.
Sep. 6:(1) Swiss Franc (CHF) tumbled as Swiss Central Bank (SNB) capped its exchange rate by pegging with Euro and imposed a EUR/CHF intervention ceiling at 1.2 minimum. The investment world began to change with one less choice of safe-haven currency.
(2) Brazil official statistics agency (IBGE) reported the benchmark 12-month IPCA inflation rate hit +7.23% YoY, the highest level since 2005.
Sep. 7:Germany Federal Constitutional Court (FCC) claimed eurozone bailouts legal, but the Germany's highest court also ruled that prior approval by the [Bundestag] Parliament Budget Committee for any future use of EFSF (European Financial Stability Facility) will be necessary and an introduction of Eurobonds may be unconstitutional.
Sep. 8:(1) U.S. President Barack Obama proposed a New American Jobs Act worth USD$447 billion, mainly by payroll tax cuts and spending increases, for the U.S. job creation and economic recovery.
(2) China agreed to support London as another RMB offshore centre in Europe.
(3) U.K. HM Treasury concluded consultation of the White Paper and Draft Bill on U.K. financial regulatory reform. Proposals included creating Financial Policy Committee (FPC) within the Bank of England (BoE) as a macro-prudential regulator to monitor systemic risks, and authorizing Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to conduct micro-prudential regulation and business conduct supervision.
(4) U.S. exports hit a new historical high of USD$178 billion in August.
Sep. 10:China imports hit a new historical high of USD$155.5 billion in August. Read more about our 2011 China Global Trade Balance target.
Sep. 14:(1) Italy parliament passed new austerity measures worth EUR 54 billion within 3 years, in order to achieve its latest target for a balanced fiscal budget by 2013.
(2) Moody's cut credit ratings of 2 major french banks, Credit Agricole and Societe Generale, owing to their sizable exposures to Greece debts.
Sep. 15:Five central banks (Europe, U.S., Swiss, U.K., Japan) announced a coordinated intervention by resuming fixed interest rate auctions for European banks in Q4. The central banks would jointly conduct short-term USD liquidity-providing operations with loans maturity lasting until March 1, 2012.
Sep. 16:(1) U.S. Treasury Secretary Timothy Geithner proposed during a meeting with EU finance ministers to expand the bailout capacity of European Financial Stability Fund (EFSF) by leveraging it like the U.S. Term Asset-Backed Securities Loan Facility (TALF).
(2) Euro-zone finance ministers deferred a decision on paying its 6th installment of bailout fund (EUR 8 billion) to Greece until next month (October).
(3) United Nations (UN) accepted Libya military rebels to replace Gaddafi's power as the official Libyan government representative.
Sep. 17:Occupy Wall Street (OWS) protest campaign officially started at Zuccotti Park (or called Liberty Park) in New York City against the greedy financial system.
Sep. 19:Obama proposed a new "Buffett Tax" for wealthy class earning over USD$1 million p.a. This should contribute USD$1.5 trillion to the U.S. deficit reduction plan in the next 10 years.
Sep. 20:S&P's cut Italy long-term sovereign-debt rating to A on its weaker economic growth outlook.
Sep. 21:(1) Yield of 10-year U.S. treasury note hit 60-year low as U.S. Federal Reserve introduced the so-called OT2 (Operation Twist) worth USD$400 billion until mid-2012 by selling short-term (maturity under 3 years) government bonds and at the same time buying longer-term (maturity from 6 to 30 years) government bonds.
(2) Moody's cut credit ratings of Bank of America (BoA), Wells Fargo, and Citigroup Inc., on fears of U.S. government might allow big bank(s) to fail.
(3) S&P's downgraded credit ratings of 7 Italian banks including Mediobanca and Intesa Sanpaolo.
Sep. 23:Moody's cut credit ratings of 8 Greece banks (including the National Bank of Greece, Agricultural Bank of Greece etc) to junk status, owing to their sizable exposures to Greece government debts.
Sep. 27:(1) Germany proposed funding from Greece state-owned assets securitization to reduce Greece's sovereign debt level, just like the method used for the previous East Germany state-owned assets.
(2) Greece voluntary debt rollover plan (set on July 21, 2011) achieved at least 90% acceptance from private creditors.
Sep. 28:China Wenzhou city launched administrative measures to deal with SME credit crisis. Read more: Inside the Chinese Private Shark Loans and SME Credit Crisis.
Sep. 29:Germany parliament approved the expansion of European Financial Stability Facility (EFSF) fund equivalent to a lending capacity of EUR 440 billion.

In conclusion, the spreading European sovereign-debt crisis and the worries on the U.S. economy slowdown continued to haunt global investment sentiment in 2011 Q3. While the credit rating agencies are busy in cutting credit ratings of the U.S. and troubled economies, we expect the worldwide financial markets will continue to suffer from huge fluctuations and uncertainties in 2011 Q4 on weak global economy recovery outlook.

UPDATE - Next article: Financial Review 2011 Q4: EU Break-up or Stronger Integration?

Related article(s):
Financial Review 2010: where had all the Hot Money gone
Important 2010 Internal Review for you


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