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Fri., May 18, 2012

Insight: Greek Exit Could Cost Eurozone 100s Of Billions Of Euros
Fri., May 18, 2012

A Greek exit from the euro zone could expose the European Central Bank and the currency bloc it seeks to protect to hundreds of billions of euros in losses, landing Germany and its partners with a crippling bill, Reuters reported in an analysis. A Greek departure would take Europe into uncharted legal waters. The size of the burden other euro zone states could bear gives them a powerful incentive to keep Greece in the currency club. With most of Greek's private creditors having taken heavy writedowns as part of the country's second, 130 billion euros bailout, it is estimated that the ECB, International Monetary Fund and euro zone nations hold approaching 200 billion of its debt. "In the event of an exit, they (Greece) will default. And the loss given default will probably be very high, high enough to eliminate the ECB's capital," said Andrew Bosomworth, senior portfolio manager at asset manager Pimco. "They might need recapitalization from governments, who are not exactly in the best position to provide additional capital." Those are not the only losses the ECB and its national shareholders might face as is explained in detail below. Even once Greece had left the currency club, the costs to the rest of the euro zone would continue to mount as it would probably be compelled to avert a complete Greek collapse and wider contagion. Read more.

Spain Approves Regional Spending Plans
Fri., May 18, 2012

Spain's government said 16 of the country's 17 regions are on track to meet this year's budget targets, a key part of its efforts to slash a towering budget deficit and ward off an international bailout, The Wall Street Journal reported. Budget Minister Cristóbal Montoro on Thursday hailed the approval of the regional spending plans, which have implemented measures equal to €18 billion ($22.9 billion) of spending cuts and increased tax revenue. He said this is the first step as Spain's central government—with stronger powers after the approval of tougher fiscal rules earlier this year—plans to monitor spending to ensure that regions meet budget-deficit targets. Separately, a senior Finance Ministry official said the government is preparing a new debt instrument that will allow the regions, currently shut out of financial markets, to raise money with the guarantee of the Spanish government. He said the ministry is in the process of defining the conditionality that will be attached to this government support. Asturias was the only region whose spending plan wasn't approved, following a three-hour meeting between Mr. Montoro and the country's regional finance chiefs. Asturias is a small northern region of little economic weight that had a contested election in late March and hasn't yet formed a stable government coalition. Spain's powerful regions—which account for almost half of government spending in the country, including key public services such as health care and education—have moved to the center of the country's fiscal crisis. With their long history of spending overruns, European Union officials and investors fear Spain won't be able to rein in the regions. This year, the regions' commitment to deep austerity cuts is crucial to the government's efforts to slash its budget deficit to 5.3% of gross domestic product this year from 8.5% of GDP in 2011. Read more. (Subscription required.)

Spain Denies Bankia Deposit Flight
Fri., May 18, 2012

Spain denied there was a deposit flight from troubled lender Bankia SA Thursday as shares in the partially nationalised bank plunged by as much as 30 per cent, the Irish Times reported. "It's not true that there is an exit of deposits at this moment from Bankia," economy secretary Fernando Jimenez Latorre, who reports to the economy minister, told a news conference. The government on May 9th took over Bankia, the country's fourth-largest lender, in an attempt to dispel concerns over the bank's ability to deal with losses related to the 2008 property crash. Uncertainty over the final cost of Spain's banking reforms has stoked investor fears that an expensive international bail-out could be on the cards, adding to concerns about the survival of the euro zone. A report in El Mundo newspaper Thursday said customers had taken out more than €1 billion over the past week, equivalent to around 1 per cent of retail and corporate accounts at the bank. Bankia and the Bank of Spain declined to comment on the report. Newly appointed chairman Jose Ignacio Goirigolzarri informed a board meeting yesterday about the exit of funds from the bank, El Mundo said, citing information from the board meeting it had seen. Bankia released data late on Tuesday showing deposits were stable in the first quarter of the year, although this was before doubts about the viability of the bank reached fever pitch and the government stepped in. Read more.

Fall in Chinese Loans Poses Economic Threat
Fri., May 18, 2012

When growth in China's economy slows, government leaders typically call on state-owned banks to make loans to rev up activity. But that tactic may not work this time, The Wall Street Journal reported. Bank lending plunged in April, according to the People's Bank of China, and has remained weak in May, bankers and borrowers said. The decline owes to companies being wary about borrowing when demand is uncertain and profits are evaporating. The fall also is due to Chinese banks' unwillingness to lend to companies in problem markets—like exporters, or companies out of favor with the Chinese government, such as property developers, and practical difficulty shifting loans to new priority areas like small businesses. The result: China's banks can't turbocharge the economy as they have in the past. "It is critical for bank lending to stabilize or pick up in order to support steady economic growth," said Huang Yiping, an analyst at Barclays Capital. But medium- and long-term loans to business, a key measure of appetite for investment, have been on a declining trend since the beginning of 2010. Data for April 2012, published last week, show 126.5 billion yuan ($20 billion) in new medium-term and long-term business loans, down 46% from a year ago. In the past, weak lending reflected deliberate moves by the government to control credit growth. This time, even before a move by the central bank last week to cut the reserves that banks are required to hold, freeing up more money to lend, funds in the banking system appear ample. Read more. (Subscription required.)

NZ Dairies In Receivership
Fri., May 18, 2012

A large Russian investment in a Waimate dairy processor has failed with receivers appointed to New Zealand Dairies, Stuff.co.nz reported. Plans to sell the $100 million Waimate dairy factory did not come off leading to the appointment of Colin Gower and Stephen Tubbs of BDO yesterday as receivers. Last month Christchurch company director Richie Smith, who advises the Russian owners, said the factory would keep processing milk as usual. He was hoping for a sale of the operation, with a Chinese company believed to be in the running to buy the factory which can process around 200 litres of milk a season into milkpowder. Neither Smith or the receivers were available for further comment yesterday. Nutrinvestholding, the parent company of Russian baby-food producer Nutritek, which owns NZ Dairies, was declared bankrupt earlier this year by a court in Moscow. As early as January 2010 signs emerged of problems with the Russian owner, reportedly undergoing a debt-restructuring. At that time Smith said Russia-based Nutritek was behind the South Island investment, as a debt restructure by it neared completion. The dairy factory at Studholme, near Waimate, has employed about 60 people and bought milk from market giant Fonterra and its own farmer-suppliers. Nutritek completed the acquisition of the factory in 2009 by buying shares in New Zealand Dairies Ltd, investing up to $150m. Nutritek has been involved with NZDL since 2006 and achieved 100 per cent ownership after a long-running ownership dispute. Read more.

Mexican Firm's Bankruptcy Case Has Cross-Border Impact
Fri., May 18, 2012

Investors and financial analysts have their eyes on a bankruptcy case, pending in a Dallas courtroom, that they say could systematically shift how American firms do business with Mexican companies, KETK reported. The case also comes at a time when business interests from both sides of the Rio Grande are pushing to include Mexico in the current Trans-Pacific Partnership negotiations. Mexican glass company Vitro S.A.B filed for voluntary bankruptcy in December 2010, after defaulting on about $1.2 billion in bond debt held by foreign banks, including American interests. But in its reorganization plan, the company aimed to place its internal shareholders in first order for bankruptcy settlement ahead of its bondholders. This was done through a rarely used strategy of creating intra-company loans from subsidiaries, said Arturo Porzecanski, a professor of international economics and international finance at American University and a senior associate with the Center for Strategic and International Studies. He added that those loans totaled $1.9 billion, more than they owed their creditors. “The company’s intention was to enable these subsidiary creditors — the ones that had lent money to the holding company — to cast votes in support of Vitro’s restructuring plan, thereby overwhelming any opposition from unrelated creditors,” Porzecanski wrote in a November 2011 study titled Mexico’s Retrogression: Implications of a Bankruptcy Reorganization Gone Wrong. Vitro’s filing was initially denied by the Mexican court in Monterrey in January 2011, and was denied again after a judge ruled the decision could not be appealed. But the apellate judge reversed himself in April and approved Vitro’s reorganization. “So why is this case so important? Because the ruling in this case is very awkward, even by Mexican standards,” Porzecanski told the Tribune. Cameron Kinvig, a Dallas-based bankruptcy lawyer, said the practice starkly contrasts with current industry standards. “What they said was ‘You know what, we are going to pay the banks — which are the senior creditors — less than 100 percent, and then we are going to let shareholders keep the money,’” he said. “It is the exact opposite of how things would work in the United States, and frankly the exact opposite of how most people agree things should work in Mexico as well.” Kinvig said that because Vitro has U.S. subsidiaries, it filed a Chapter 15 action, which asks the U.S. Court to respect the Mexican court’s ruling. That case is pending in Dallas. Read more.

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