Europe’s central banks to reveal cost of QE binge – Industry roundup: 21 February
by Graham Buck
Eurozone’s central banks to reveal costs of QE
Central banks across the eurozone will reveal their first significant losses from a decade of money printing in the coming weeks, heralding a new era of scrutiny and the prospect of taxpayer bailouts, according to a Bloomberg report.
The European Central Bank (ECB) releases its annual results on Thursday, when officials are expected to warn of big shortfalls this year and next across the region as higher interest rates push up the cost of servicing deposits built up through quantitative easing (QE).
The ECB release presages a series of national reports, with Germany’s Bundesbank potentially facing the biggest hit of all the report predicts. “Results will turn negative for many banks already in 2022, because of the mismatch of interest rates on assets and liabilities,” Bank of Portugal Governor Mario Centeno told Bloomberg.
“We finance ourselves now at higher interest rates, which do not match the return of bonds and all sorts of debt in the central bank’s balance sheet.”
The Bundesbank is expected to post small losses for 2022, rising to €26 billion (US$28 billion) in 2023 if ECB rates stay at current levels, according to Daniel Gros, a board member of the Centre for European Policy Studies (CEPS) in Brussels; wiping out €20 billion of provisions for losses on asset purchase programmes as well as €5 billion of capital and reserves. For a normal company, that could spell insolvency.
The report notes that during the last episode of repeated losses in the 1970s, officials rolled over shortfalls into subsequent years, raising the prospect that they might just do that again.
Other counterparts also face big losses in 2023, although not enough to wipe out capital. Gros expects those to total €17 billion in France, €9 billion in Italy and €5 billion in the Netherlands. If rates remain high in 2024, the Dutch and French central banks would be at risk of negative equity too.
The full report can be accessed here.
Regions in US, China “most exposed to climate damage”
Major industrial and economic centres in China and the United States are among the most vulnerable regions in the world to the increasingly destructive power of climate change-driven weather extremes, according to climate risk assessment specialist The Cross Dependency Initiative (XDI).
It says that its findings underscore the urgent need for governments to focus on decarbonisation and adaptation measures such as flood-proofing – and show the economic fallout from climate change could be grave and widespread.
Nine of the top 10 most at-risk regions are in China, with two of the country’s largest sub-national economies – Jiangsu and Shandong – leading XDI’s global ranking. After China, the US has the most high-risk states. Florida, number 10 in global rankings, is the US state most in jeopardy, followed by California and Texas.
China, India and the United States make up over half the states and provinces in the top 100. “We get an extremely strong signal from countries like China, from the US and India, and we see essentially the engine rooms of the global economy where there is a lot of built infrastructure,” said Karl Mallon, XDI’s head of science and innovation, at a briefing.
The analysis found that both inland and coastal flooding pose the greatest risks to physical infrastructure. The report also examined the dangers of extreme heat, forest fires, soil movement, extreme wind and freeze thaw.
The analysis covers over 2,600 territories globally, modelling damage from 1990 to 2050 based on a “pessimistic” scenario of global warming of 3 degrees Centigrade by the end of the century outlined by the United Nations’ Intergovernmental Panel on Climate Change.
The researchers say it is the most comprehensive data crunch of its kind and hope it will inform future climate and economic policy. It could also impact investment decisions as companies reassess financial risks based on climate change related exposure in vulnerable areas.
“Folks who are looking to build a factory, establish a supply chain that involves those states and provinces are going to think twice about where they are,” said Mallon. There could be “at best, a risk pricing into those areas, at worst, maybe a capital flight as those investors seek to try and find safer havens.”
Other economic hubs in the top 100 include Beijing, Buenos Aires, Ho Chi Minh City, Jakarta, Mumbai, Sao Paulo and Taiwan.
Australia, Belgium, Canada, Germany and Italy also have states and provinces in the top 100. In Europe, Germany’s Lower Saxony region is most at risk, while Italy’s Veneto region – home to the lagoon city of Venice – is ranked number four in Europe. South-east Asia sees the steepest escalation in damage from 1990 to 2050, according to the modelling.
Investment grade corporate debt attracts record demand
Higher yields and worries about riskier debt have triggered a stampede into the investment-grade market, with investor demand for high-quality corporate bonds at a record level.
Data from fund flow tracker Emerging Portfolio Fund Research (EPFR) in the first weeks of 2023 a total of US$19 billion poured into funds which buy investment grade corporate debt around the world, the most ever at this point in the year.
Investors have shown an appetite for an asset class that is typically seen as relatively low risk but which now offers the best returns in years. The influx of cash reflects their eagerness to lock in historically high yields provided by the safest corporate debt after a bruising sell-off in 2022, and the fact that they no longer need to push into riskier corners of the credit market in search of decent returns.
“People basically think that fixed income in general looks a lot more attractive than it has in prior years,” said Matt Mish, head of credit strategy at UBS, told the Financial Times.
“The euphoria around investment grade is basically more broadly this euphoria around yields,” he added. “At least relative to last year and really relative to most of the last decade, [high-grade corporate debt] is offering yields that are considerably higher.”
The FT reports that average US investment grade yields have risen to 5.45% from 3.1% a year ago, having touched their highest level since 2009 in late 2022. Much of that rise reflected a broad fixed income sell-off over the past year as the US Federal Reserve and other major central banks rapidly lifted interest rates in response to resurgent inflation.
Yields have also risen sharply on more speculative junk-rated debt, but many fund managers say they prefer to stick with debt issued by companies better-placed to weather a potential economic downturn as higher interest rates slow the economy.
European banks may have to quit India’s capital markets
Europe’s banks have warned they will be forced to exit India’s capital markets if regulators cannot resolve a dispute over traders’ access to the country’s booming securities and derivatives markets.
Industry figures are concerned that the stand-off between EU and Indian regulators will not be settled before an April 30 deadline. This threatens to leave European Union (EU) leaders with little choice but to pull out from trading in the country over the coming months, until they can find a compromise that would probably shrink their businesses.
The dispute originated with an announcement by the European Securities and Markets Authority (ESMA) last October that it would no longer legally recognise India’s six main clearing houses (CCPs) because, it said, its existing accord with local authorities was inadequate.
A clearing house stands between two parties in a trade, insulating the market from contagion if there is a default.
ESMA said it would defer withdrawing legal recognition for six months to resolve the dispute.
India’s stock and government bond markets are valued at about US$3 trillion and US$1 trillion respectively, and its derivatives market is among the most active in the world, making the trio lucrative for western lenders.
Bankers and trade bodies said that last year ESMA began pushing Indian regulators to sign a revised deal that would give the Paris-based agency more direct oversight of the six Indian CCPs that EU banks use to process market transactions in India. The Reserve Bank of India (RBI) reportedly balked at the new agreement.
Banks are particularly worried about access to derivatives clearing, as unwinding thousands of open contracts. The industry groups estimated that EU, UK and Swiss financial institutions accounted for more than 60% of derivatives cleared on The Clearing Corporation of India Ltd (CCIL), India’s largest clearing house.
“We are at the moment where banks have to make a decision as to the future of their clearing activities in India, and they will have to make it within the next few weeks,” said the Asia head of one industry body behind the letter.
Chinese banks keep lending rates on hold
Chinese lenders have followed the central bank by keeping their benchmark lending rates unchanged, but analysts expect reductions later this to support the post- zero Covid economic recovery.
The one-year loan prime rate (LPR) was held at 3.65% for a sixth consecutive month, in line with the forecast. The five-year rate, a reference for mortgages, was also kept at 4.3%, as expected, data from the People’s Bank of China (PBOC) showed.
The loan rates are based on one of the PBOC’s key interest rates, which was kept on hold last week amid signs of a recovery in corporate loan demand. The central bank is assessing the economy’s need for further stimulus as latest indicators point to a faster-than-expected recovery following the scrapping of Covid restrictions in late 2022.
The PBOC could still cut its key rates and drive bank loan rates lower in coming months, according to analysts, given challenges to China’s growth outlook from a property downturn, weakening exports and fragile consumer confidence.
“There are decent signs of recovery in the service sector, which has been hammered by the pandemic, but household confidence remains weak due to the overhang of Covid-related income shocks, and the property recovery is still shaky,” said Michelle Lam, Greater China economist at Société Générale.
The LPRs are based on the interest rates that 18 banks offer their best customers and are published by the PBOC monthly. They are quoted as a spread over the rate on the medium-term lending facility — the PBOC’s one-year loans — which last changed in August 2022.
“We still think the recovery will require an extra monetary boost, though, and see rates heading down in the next month or so — all the more so if activity data in the first quarter disappoint,” said Eric Zhu, a Bloomberg economist. “We expect a 10-basis points (bps) cut in the medium-term lending facility (MLF) rate in March or April. That should guide LPR rates lower too.”
China’s uneven recovery is evident in recent loan data. Companies’ borrowing surged in January after the PBOC urged banks to “front-load” credit extension and help support the economy. Consumers, however, stayed cautious and rushed to make early repayment of their mortgages.
Stronger demand for loans partly led to a tightening in liquidity conditions and a rise in interbank borrowing rates in recent weeks. The PBOC stepped in last week to add more cash into the interbank market to ease the cash shortage.
Ghana verges on debt default
Ghana is nearing a debt default as the grace period on a US$40.6 million coupon due on its dollar bond maturing in 2026 is expiring. The coupon was originally due on 18 January and is the first since the West African nation unilaterally suspended payments on most of its external debt in December.
Asked if the government intended to pay, a finance ministry spokesperson sent a copy of the 19 December press release announcing the suspension of payments on eurobonds, declining to comment further.
Ghana has been engaging investors since November to restructure about US$30 billion of its US$46 billion in local and international debt. It recently completed the first part of a domestic restructuring, with investors exchanging 83 billion cedis (GHS)(US$6.7 billion), or 64% of holdings, for new securities, against an overall target of 80%. It aims to start “substantive” discussions with international bondholders and their advisers in coming weeks, Minister of Finance Ken Ofori-Atta said last week.
“They are in default,” confirmed Kevin Daly, a London-based investment director at abrdn, which is part of the bondholders’ committee. “They said we are going to stop paying coupons on all their bonds, that is part of your restructuring process.”
Africa’s second-biggest gold producer becomes only the fourth Sub-Saharan country to default on an international bond payment, after Zambia, Mozambique and Ivory Coast.
Ghana will commit soon to restructuring talks with eurobond holders, Daly said. As much as US$13 billion of dollar bonds are up for reorganisation, according to data compiled by Bloomberg. Private creditors may take a haircut of as much as 30% on the principal and be asked to forfeit some interest payments, a deputy finance minister hinted in November. The private lenders should brace for more losses than bilateral creditors, Ofori-Atta said.
Separately, the government has offered to reschedule payments on bilateral debt without principal haircuts, according to sources familiar with the matter, sparing this segment of creditors from some of the losses others face.
The West African nation is seeking concessions from creditors to unlock a $3 billion International Monetary Fund loan by March. The nation wants to reduce liabilities from an IMF estimate of 105% of gross domestic product (GDP) in 2022 to 55% by 2028.
Deutsche Bank completes digital fund management PoC
Deutsche Bank and Singapore-based blockchain-base services specialist Memento Blockchain have successfully completed a proof of concept (PoC) – known as Project DAMA (Digital Assets Management Access) – that aims to provide a more efficient, secure, and flexible solution for digital fund management and investment servicing.
Project DAMA, a collaboration between Deutsche Bank and Memento Blockchain, was awarded the Monetary Authority of Singapore (MAS) Financial Sector Technology Innovation (FSTI) Proof of Concept (POC) grant on 5 August 2022, “seeks to tackle the myriad of challenges associated with launching or accessing digital funds including high costs and time-consuming processes.
“The solution provides asset managers and their existing transfer agents, fund administrators, and custodians with a bolt-on, one-stop digital fund investment servicing platform that significantly reduces the effort required to launch and administer digital funds.” At the same time, Project DAMA aims to be an open architecture platform that can facilitate investor access to various funds from different asset managers, as well as cater to different custody models.
“Digital asset management and digital funds are the natural next steps after asset tokenisation,”said Anand Rengarajan, Deutsche Bank Global Head of Sales & Head of Asia Pacific, Securities Services. “Through Project DAMA, we have been able to demonstrate the viability of transitioning into the future of digital finance through several innovative asset management and investment servicing features including digital identity, mass customisation and decentralised applications.
“The extension of traditional fund services with digital capabilities can significantly lower cost-related barriers to entry for asset managers looking to launch a digital fund – and for qualified investors seeking exposure to such funds. We look forward to the future possibilities.”
Barclays adds Italy to corporate cash management platform
Barclays Corporate Banking has announced the launch of its cash management forex and debt platform in Italy, allowing corporate customers to access a pan-European cash management service.
The platform is already available in Ireland, Germany, the Netherlands, Luxembourg, Belgium, France, Spain and Portugal, the UK bank added in a statement.
Chubb issues report on supply chain risk
Businesses must develop a more robust understanding of the make-up of critical multi-tier supply chains in order to mitigate the impact of disruption, according to The Spectre of Disruption: Supply chain risk and what you need to know, a new report from insurer Chubb UK.
As part of a two-part series focusing on present and emerging supply chain risks, Chubb analysed the current international supply chain risk landscape to identify some of the main issues impacting businesses around the world.
Businesses have experienced unprecedented disruption to just-in-time (JIT) supply chain models in the wake of several man-made and natural disasters, along with geopolitical events such as Brexit, Covid-19, the Russia-Ukraine war, rising inflation and the risk of a global recession.
These global events have caused “a stream of knock-on effects” to supply chains and logistics, according to the Chubb report, including mass labour and goods shortages, container costs, energy access, and other local factors such as workforce strikes and port congestion.
“The past few years have taught us that robust risk management and business resilience strategies are critical to future-proofing supply chains,” said Peter Kelderman, Chubb Europe’s marine risk management leader and co-author of the supply chain risk report.
“This report series demonstrates how important it is for global businesses to have an understanding of the developing exposures across their supply chains and to be equipped with the right strategies and support to reduce their exposure to business interruption.”
In the first part of the report, Chubb examines developing supply chain trends, including causes and effects and what they mean for organisations in the UK and globally. The second part considers how organisations can build resilience in their supply chains through robust risk mitigation, including strategies to enable risk and supply chain managers to develop risk management capabilities, build operational strength, and prepare for other challenges.
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