Daily Insolvency News Headlines

Fri., October 10, 2014

Fri., October 10, 2014

Ukraine will need additional bailout financing from outside the International Monetary Fund to keep the war-torn economy afloat, the head of the IMF said Thursday. The cost of the conflict with Russia-backed separatists has changed the country’s cash needs since the IMF originally designed a $30 billion international bailout program in April, of which the fund pledged to cover $17 billion. “Additional funding will have to come” after the IMF reviews the current bailout strategy in December, IMF Managing Director Christine Lagarde said at a Bretton Woods Committee event on the sidelines of the annual IMF and World Bank meetings of finance ministers and central bankers. “To assume that the additional funding will have to come from the IMF, I think is rather far-fetched,” she said. “If the economy has to be restored and stability maintained, money will have to come from multiple sources.” The IMF chief’s comments acknowledge what many economist and analysts outside the fund have been warning for some time. The IMF’s latest forecast still projects the economy expanding next year, albeit at a sluggish rate, even though the World Bank said the country will likely be in a deep recession until at least 2016. The IMF says the April bailout was predicated on the expectation that the conflict in eastern Ukraine would halt in early autumn. Read more. (Subscription required.)

Fri., October 10, 2014

The Espírito Santo Financial Group, which at one point held about 25 percent of the bailed-out Portuguese lender Banco Espírito Santo, said on Thursday that it would file for bankruptcy after it was denied creditor protection by a Luxembourg court last week, the International New York Times DealBook blog reported. Espírito Santo Financial is part of a complex web of companies controlled by the Espírito Santo family. Portuguese regulators were forced to engineer a rescue of Banco Espírito Santo in August after the Portuguese bank was undone by its exposure to its struggling corporate parent, Espírito Santo International. The bank, one of Portugal’s largest financial institutions, was shut down and its healthy businesses were transferred to a new entity, Novo Banco. Espírito Santo Financial was one of several entities that sought creditor protection after regulators raised questions this year about “irregularities” in its corporate parent’s finances. In a filing with regulators in Portugal on Thursday, Espírito Santo Financial said that it and another unit, Espírito Santo Financière, would file for bankruptcy after a Luxembourg court turned down their request for so-called controlled management. Read more. (Subscription required.)

Fri., October 10, 2014

China has taken a big step towards the resolution of its mounting local government debt burden with the introduction of a legal framework allowing cities and provinces to issue debt directly, Reuters reported. Last week's regulations make it clear that the central government will not bail out local obligations, a key step in creating a municipal bond market that analysts expect will reach Rmb1trn (US$164bn) of new issues in 2015. "The amendment to the budget law provided the necessary legal foundation to develop the municipal bond market in China," said Julia Wang, a Hong Kong-based economist at HSBC. "The State Council directive is an important step toward clarifying where liabilities ultimately lie." China amended the budget law in August to allow local governments to issue debt, and a Rmb109bn pilot scheme involving 10 municipal and provincial issuers has been in place since May. Last week's regulations from the State Council provide further details on eligible borrowers, the use of proceeds and the fate of existing local government borrowings. New debt must be raised directly by local governments - namely provinces and special administrative regions - and not through associated companies. Proceeds can finance public projects that generate no income, such as parks and schools, and projects with defined income streams, such as toll roads. Municipalities cannot, however, use bonds to cover routine expenditures such as staff salaries. Read more.

Fri., October 10, 2014

“We will not kick you when you are down, at least not for a couple of days”: that is the gist of a putative deal struck by 18 global banks this week, which agreed not to pull abruptly out of contracts with each other if one of them hits the buffers. As modest as that may sound, regulators see it as the foundation of a firewall to halt the spread of future financial crises, The Economist reported. The agreement concerns derivatives, contracts whose value “derives” from the performance of an underlying asset such as a share, currency or bond. Banks use them to hedge themselves or speculate, to the chagrin of regulators who dislike how hard they are to value and how easily they can entangle financial institutions in a web of interdependency. If a bank will benefit from invoking its right to demand early settlement of such contracts when a counterparty runs into trouble, it tends to do so, naturally enough. Lehman Brothers discovered this in 2008; bankruptcy lawyers are still untangling the mess. If everyone cuts and runs at once, however, the stricken party has to hand over cash when it can least afford it, deepening the crisis. By contrast, a brief stay might give regulators time to right a listing bank, by forcing it to sell off still-healthy units, say. America and Europe have instituted such moratoriums since the crisis, but these do not apply to cross-border deals. Global rules which extend the principle to asset managers and others are in the pipeline. Read more.

Fri., October 10, 2014

A drop in German exports added to a string of ugly data for Europe’s biggest economy, suggesting Germany’s growth has faltered and the country might even be in a shallow recession, The Wall Street Journal reported. German exports in August fell 5.8% from the previous month, data released on Thursday showed, the biggest monthly decline since the 2009 recession. The slide in exports came after poor readings for German manufacturing orders and factory output, and added to the gloom surrounding Europe’s economic outlook. Leading German economics institutes also sharply cut their growth forecasts for this year and next on Thursday, warning that sagging domestic business confidence and export prospects will weigh on Europe’s industrial powerhouse. Gathering signs that Germany is facing a period of stagnation come as the eurozone’s economic recovery, already anemic since it began in 2013, is in danger of losing steam altogether. Feeble growth across most of the Continent, and stubbornly high unemployment in many eurozone countries, are pressing Europe’s governments to rethink their recent focus on budget austerity. With inflation running at far below normal levels, the European Central Bank is also under pressure to stimulate economic activity through new asset-purchase programs, although such proposals face deep political skepticism in Germany. Read more. (Subscription required.)

Fri., October 10, 2014

Greece should have a precautionary credit line to help it regain normal access to bond markets, the head of the IMF said Thursday, The Wall Street Journal reported. “The country would be, in our view, in a better position if it had precautionary support,” International Monetary Fund Managing Director Christine Lagarde said in a news conference. The IMF’s precautionary facilities give countries access to a credit line that can assure investors the country can pay its obligations, keeping borrowing costs down. Such credit lines don’t add to the countries’ debt burden unless they are used. “We’re talking about evolution in the relationship,” Ms. Lagarde said. “So we are ready to help and we believe that it could be effective.” The idea is to use the remaining $16 billion in the current program as a backstop facility. If it didn’t draw on the facility, the move would slim its debt load and repayment costs. It might also help Greece to potentially tap the European Central Bank’s program to buy asset-backed securities of member countries as a way to ease financial conditions. ECB President Mario Draghi said Greece needs to be in a monitored financing program to win access to the central bank’s purchase operations. Read more. (Subscription required.)

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