Deutsche Bank & the Ballad of the Bumbling Germans

♠ Posted by Emmanuel in ,, at 9/28/2016 04:33:00 PM
You know, Deutsche Bank was really well-respected once upon a time.
I am old enough to remember a time when the now-infamous Deutsche Bank had one of the highest credit ratings of European banks. But that was before the turn of the millennium--a long, long time ago in a political economy far, far away. What happened between then and now? The curse of (global) ambition, that's what. Just as American giants like Citigroup and European ones like HSBC thought that harnessing economies of scale represented the way of future, Deutsche too embarked on a multi-country expansion into different product lines. Today, of course, the era of the global universal bank dream is well and truly over:
Other global banks are also rethinking their models. Barclays Plc is looking to sell down its business in Africa and has stopped trading stocks in Asia. Royal Bank of Scotland Group Plc, once Europe’s largest lender, has abandoned almost all foreign operations, retreating to its home market in the U.K., and is getting out of most capital-markets businesses. Deutsche Bank AG wants to sell a German consumer bank it bought in 2010 and is cutting back bond trading.
The question remains: OK, if major banks had already begun the process of retrenching--especially post-global financial crisis--then why is Deutsche Bank especially in trouble? Simply, its leadership still harbored delusions of globe-spanning grandeur as late as 2014:
It was the defining bet of Anshu Jain’s reign at Deutsche Bank. In 2014, as most European banks were retrenching in the face of slackening markets and tightening regulation, the German lender’s then co-chief executive took the opposite course.

Two weeks after Barclays — Deutsche’s European arch-rival — capitulated to market pressure and slashed its debt trading business, Deutsche launched a plan to raise €8bn in capital. The move was, in part, designed to give Germany’s biggest bank the firepower to win market share as its rivals faltered, and to position it as the last remaining European challenger to the US titans on Wall Street. Deutsche, Mr Jain said at the time, would be the “only truly universal bank based in Europe”.

That bet failed: markets remained slack and regulation kept tightening. Two years on, Mr Jain and Jürgen Fitschen, with whom he shared the top job, have stepped down. Deutsche’s investment bank has lost its top three ranking. The group’s capital position is under scrutiny. And Mr Jain’s successor, the former UBS banker John Cryan, has embarked on a painful curtailing of Deutsche’s global ambitions.

Mr Cryan faces a formidable task. Deutsche’s markets business, which accounts for a third of its revenues, is struggling to cope with a world of lower trading volumes, tougher capital requirements and increasing US dominance. Its retail bank in Germany, where margins were always thin, is suffering under Europe’s rock-bottom interest rates. Total costs are stubbornly high and the bank is grappling with legal challenges that could cost it billions of euros. Last year, Deutsche — a pillar of Germany’s postwar economic strength, and a cog in global capital markets — made a €6.8bn loss amid a host of fines and writedowns. Analysts predict an €860m loss this year.
Today's Deutsche thus has a wafer-thin capital cushion and several unprofitable lines of business. This amidst all sorts of "legacy" costs emanating from its past activities. While the $14B fine proposed by US Department of Justice for Deutsche's past mortgage security-related indiscretions will likely be reduced, even a fine half of that would severely strain the bank's resources.

The bank's troubles are putting German leaders in a pickle. Having insisted to other countries that they should not bail out their troubled lenders come hell or high water during recent years, Chancellor Angela Merkel and Finance Minister Wolfgang Schauble would rightly be accused of being hypocrites if they came to Deutsche Bank's rescue. That said, the pan-European effects of its demise would be huge and likely hurt other Europeans too:
A few years into the eurozone crisis, Chancellor Merkel and her finance minister, Wolfgang Schäuble, led a charge against state-sponsored bank bailouts. Instead, they championed new European rules, now in force, that compel creditors—mainly bondholders and, in some cases, depositors—in troubled banks to chip in before the government steps in.

“State aid won’t happen,” Thomas Oppermann, floor leader of the ruling Social Democrats, told reporters on Tuesday. “It’s now, first of all, up to the bank to solve the problems.” Still, few analysts expect that Deutsche Bank could be left to fail or be forced into a bail-in. The risk, many say, would spread far beyond Germany. Deutsche is a large and highly networked bank on a continent replete with fragile lenders and economically hamstrung after years of low growth.
It's a no-win situation for Germany. I think its leadership will lean on the US to lessen the fine or even defer a portion of it, but the reputational damage is already done. Germans have a reputation for competence and efficiency, but modern-day Deutsche Bank is strictly Amateur Nite. To paraphrase Pink Floyd, encumbered forever by desire and ambition, this is the sad end for a hunger left unsatisfied.

Turkey's Erdogan: Go Ahead, Junk Our Credit Rating

♠ Posted by Emmanuel in at 9/25/2016 11:35:00 AM
"Go ahead, make my day by junking Turkey's credit rating."
Following the hateful rhetoric unleashed by Philippine President Duterte, it appears bashing the West is back in fashion as Turkey's Tayyip Erdogan does pretty much the same--to equally debatable economic consequences. There is a tendency for developing countries to blame destabilizing events on Western powers, and Erdogan is no exception in this regard when it comes to the coup attempt against him earlier in the year.

On a related note, Erdogan sees a combined political-economic effort to knock Turkey down a peg as the dominant credit rating agencies--all Western, obviously--have put the nation on notice for downgrades to its sovereign debt. Following Erdogan's conspiracy-minded logic, it is of a piece with the white man trying to undeservedly humiliate Turkey:
Turkey’s President Recep Tayyip Erdogan said he is not worried if his country is rated below investment grade as credit rating firms are making wrong decisions because of their political bias. “I don’t care at all, they’re making mistakes and they’re doing it intentionally,” Erdogan said in an interview in New York on Thursday. “Whether you’re honest or not, Turkey’s economy is strong.”
This after Standard and Poors cut Turkey two notches below junk, while the others have placed a negative outlook following the coup:
S&P Global Ratings lowered Turkey’s rating immediately after the July 15 attempt to topple Erdogan citing greater political risks. It was cut by one notch to BB, or two steps below investment grade. Last month, Fitch Ratings maintained its BBB-, the lowest investment grade, while reducing the country’s outlook to negative from stable. That is in line with Moody’s Investors Service, which has placed the country on review for a possible downgrade to junk.

The ratings companies are acting “contrary to economic ethics,” making political statements, Erdogan said. “They’re raising economies that have collapsed, that are finished, on the other hand, they’re either freezing or going towards cutting a country that’s standing on its feet, that’s upright, and where investments are continuing.”

“This is not a respectable stance,” he said. “I’m inviting them to be honest.” Moody’s, which rates Turkey at Baa3, has placed the country on review for a downgrade within 90 days from the day of the statement on July 18. Back in August, Fitch cited “the potential for further disruption from those behind the coup attempt.”
By way of comparison, the Philippines whose GDP per capita is about 36% of that of Turkey receives investment credit ratings from all three. You have to wonder if Duterte keeps acting like, well, Duterte how long it will be before it joins Turkey in junkland. Having striven to reach investment grade ratings for their sovereign debt, loose cannon leaders can hasten their banishment from international economics' promised land.

Philippines' Duterte: Killer of Druggies...& Foreign Investment

♠ Posted by Emmanuel in ,, at 9/23/2016 03:51:00 PM

Damage control surpasses the realm of art into science when the person whose offensiveness you're trying to contain is the Philippine President Rodrigo "Digong" Duterte. Despite the woeful history of a zero tolerance approach to narcotics worldwide--nowhere has the "war on drugs" worked as intended--Duterte is intent on learning this the hard way. Being very think-skinned, Duterte takes any perceived slight very badly, hurling insults at any and all critics.

As it so happens, those who have raised concern about human rights abuses as the body count piles up via extrajudicial killings in his "war on drugs" represent the world's most powerful countries.
President Barack Obama refused to meet Duterte at an ASEAN gathering in Laos after being cursed as a "son of a whore" over possibly raising the issue of human rights. More recently, Duterte threw the  middle finger at the European Parliament over mentioning similar human rights concerns, adding an f-bomb to get his point across.

While the shallow and stupid are doubtlessly happy about Duterte sticking it to leaders of wealthy countries--screw the imperialists and so on and so forth--the sensible are left holding the bag in mending relations with increasingly antsy international counterparts. Consider that, for every single day in September so far, foreign investors have reduced their holdings of Philippine equities. This turn of events has prompted Philippine central bank officials to come out en masse to downplay Duterte's offensive outbursts. These include eight-time [!] best central banker in the world awardee Amando Tetangco:
Philippine central bank Governor Amando Tetangco sought to soothe investors spooked by President Rodrigo Duterte’s rhetoric around his anti-drug war, with stocks poised for the longest outflow since 2007.

“If you take out the noise and look at the fundamentals, look at the economic program, look at the quality of the members appointed to the economic team, then these are all solid,” Tetangco told bankers, traders and fund managers late Thursday in Manila.

Tetangco joins a host of economic officials including Finance Secretary Carlos Dominguez, who on Wednesday said economic policies have been clear and consistent since Duterte took office in June. S&P Global Ratings this week warned of “rising uncertainties surrounding the stability, predictability, and accountability” under the new government.
Meanwhile, money is leaving the country continuously:
Money that flowed into the Philippines after the May elections is drying up. Philippine stocks slid 0.7 percent on Friday, and foreign funds have been selling for 21 straight days as of Thursday, the longest outflow since 2007.

The peso slumped to an eight-month low against the U.S. dollar and is the worst-performing Asian currency after the yuan this year. Foreign direct investment shrank 41 percent in June from a year earlier.
The irony remains that, if you make the reasonable assumption that this "war on drugs" will be as futile as every other, he will have given his country significant political and economic handicaps besides by acting this way. Who benefits?

Correlation Between Mexican Peso, Trump Poll Numbers

♠ Posted by Emmanuel in at 9/18/2016 02:05:00 PM
The Mexican peso seemingly moves in the opposite direction to Trump's poll numbers these days.
America's Mr. Nasty is apparently making his presence felt south of the border. With Mexico being on the receiving end of a lot of his isolationist (he suggests leaving NAFTA), protectionist (ditto) and racist (characterizing the Mexican people as "rapists") rhetoric, the political fallout of a Trump presidency (heaven forbid) have not gone unnoticed in the markets. The far right has well and truly established a presence in North America.

Bloomberg offers the chart above in relation to the performance of the Mexican peso, whose fortunes as of late mirror those of Trump's polling numbers in the upcoming US presidential elections. The write-up suggests as much. Also, revisit NAFTA:
Concern Trump will follow through on his promises regarding Mexico if elected has helped the peso weaken 10 percent this year, the worst performance of any major currency apart from the U.K. pound. It was last week’s biggest loser, sliding 1.7 percent, and has since dropped to the lowest since June after Democratic presidential nominee Clinton’s campaign announced she was ill.

The peso’s status as the most-liquid emerging-market currency after China’s yuan has left it particularly vulnerable to selling, sending it to repeated record lows and forced the central bank to raise interest rates.

Mexico is arguably the major world economy most dependent on the U.S. Trade between Mexico and the U.S. has grown fivefold to more than $500 billion in goods annually since Nafta took effect in 1994, making the Latin American nation the largest U.S. trade partner after China and Canada, according to data from the International Monetary Fund. While Mexico has also strengthened its trade ties with other nations and has a free-trade agreement with the EU, it still sent 73 percent of exports to the U.S. in 2015, compared with 79 percent the year before Nafta was implemented.
There's also Trump's talk about holding Mexican expatriates' remittances hostage to building his now-infamous wall which the Mexican government would pay for:
In addition to ending Nafta, Trump has said he’ll make Mexico pay for the wall -- a proposal that the government has repeatedly said is a non-starter -- by holding remittances from immigrants in the U.S., which play an important role in bolstering the peso.
It's no surprise that nasty things happen when the topic turns to the nasty guy.

Do Saudis Dump '$750B' After US 9/11 Bill Passes?

♠ Posted by Emmanuel in , at 9/10/2016 06:03:00 PM
Saudi Arabia vowed to slash '$750 billion' worth of US assets if 9/11 victims' families were allowed to sue it. We'll see.
Back to the realm of geopolitics: Earlier this year, Saudi Arabia warned that they stood ready to unload hundreds of billions worth of American assets were the US congress to pass a bill allowing families of victims of the 9/11 attacks to sue Saudi Arabia for damages. Maintaining that their country had no direct involvement in the attacks, Saudi officials threatened to sell off up to "$750 billion" in American assets. From the NY Times in April:
Saudi Arabia has told the Obama administration and members of Congress that it will sell off hundreds of billions of dollars’ worth of American assets held by the kingdom if Congress passes a bill that would allow the Saudi government to be held responsible in American courts for any role in the Sept. 11, 2001, attacks...

Adel al-Jubeir, the Saudi foreign minister, delivered the kingdom’s message personally last month during a trip to Washington, telling lawmakers that Saudi Arabia would be forced to sell up to $750 billion in treasury securities and other assets in the United States before they could be in danger of being frozen by American courts.

Several outside economists are skeptical that the Saudis will follow through, saying that such a sell-off would be difficult to execute and would end up crippling the kingdom’s economy. But the threat is another sign of the escalating tensions between Saudi Arabia and the United States.
OK, that was the story in April. Fast-forward to the present time and US lawmakers have not taken Saudi threats seriously as the bill passed unopposed through the lower house:
The unopposed House vote Friday to allow families of Sept. 11 victims to sue Saudi Arabia begins a diplomatic nightmare for President Barack Obama.

The legislation is sure to antagonize a key U.S. ally in the Middle East which already has tense relations with the administration. While Obama is likely to veto the bill, the House’s passage by voice vote raises the possibility Congress could override him, for the first time in his presidency, and make the measure law. The bill passed the Senate by a voice vote in May.

"The Saudis will see this as a hostile act," said Dennis Ross, Obama’s former Middle East policy coordinator. "You’re bound to see the Obama administration do everything they can to sustain a veto."

The bill would carve out an exception to sovereign immunity -- the legal doctrine which protects foreign governments from lawsuits -- if a plaintiff claims to have suffered injury in the U.S. from state-sponsored terrorism.
My belief is that the Saudi government did not directly fund the 9/11 attackers. However, that monies it has spent buying off hard-line extremists could have indirectly funded the attacks is not out of question. It would be up to the 9/11 victims suing KSA to demonstrate culpability via a money trail, which appears difficult to establish. What is more immediately interesting though is whether the Saudis merely bluffed about dumping American assets. Treasury records indicate that the country holds $98.3 billion in US Treasuries as of June 2016. Saudi Arabia may hold more though through indirect purchases:
Saudi officials have said enactment of the law could lead them to sell off the kingdom’s U.S. Treasury debt and other American assets, which totaled $750 billion, the officials told U.S. lawmakers and others in the government, according to the New York Times. The Saudi government held $117 billion in U.S. Treasury debt in March, according to Treasury figures obtained by Bloomberg. The kingdom may have additional holdings not included in the data on deposit with the New York Federal Reserve Bank, in entities in third countries, or through positions in derivatives.
Saudis can also sell off tangible investments in the US, though the stock of FDI of Middle Eastern countries as a whole in the US appears to make $100B a stretch. Moreover, hard assets are not as liquid and take time to sell.

So the questions for Saudi Arabia over the next few days are as follows: First, US lawmakers having called their bluff, will the Saudis really unload hundreds of billions worth of assets? Second, do they really have $750B to unload in US assets? Saudi Arabia officially states that it has $572B in reserves, but it's a dwindling amount as low oil prices take its toll on the nation's coffers. Accelerating the reduction of its rainy-day funds at the current time would seem an unwise move.

I'd say it's the Saudis' own exercise in Trump-style hyperbole, but we needn't wait much longer to see how things pan out.

9/12 UPDATE: Obama intends to veto, to no one's surprise:
President Barack Obama will veto legislation that would allow families of Sept. 11 victims to sue Saudi Arabia, a measure vehemently opposed by the U.S. ally, White House press secretary Josh Earnest said on Monday.

The measure passed both the House and Senate unopposed by voice votes, with the House acting on Friday to send the bill to Obama just ahead of the 15th anniversary of the terrorist attacks. The lack of public opposition suggests Congress could override Obama’s veto for the first time in his presidency and make the measure law.

"The president does intend to veto this legislation," Earnest told reporters on Monday. The administration had opposed the legislation, arguing it would set an international precedent that would expose the U.S. government and American soldiers to legal jeopardy in foreign courts.

Spain Beats EMU Growth Without a Government

♠ Posted by Emmanuel in at 9/05/2016 12:17:00 PM
Maybe Spain is outdoing its EMU peers because of--and not in spite of--having no government.
Rational choice theory holds elected officials in disdain as self-interested in political and economic gain ahead of serving the public good. Today's Spain might be an appropriate test of rational choice theory insofar as the country has not formed a government in eight months and counting. With the current caretakers having failed to do so again, never-ending elections are set to be held once more in December.

What's notable though is that government-less Spain has actually outdone its EMU peers' overall economic performance:
In Spain, nurturing the economy is so far proving easier than forming a government. Corporate investment has helped sustain growth this year, even as efforts to establish a government continue to stumble eight months on from a first round of general elections in December. With the political deadlock set to drag on after Acting Prime Minister Mariano Rajoy lost a confidence vote in parliament on Friday, the strength of the recovery may be put to the test.
Economic actors appear to be shrugging off the lack of a government:
Investment in capital stock such as factory equipment jumped 2.2 percent in the second quarter as exports climbed 4.3 percent. The economy grew 0.8 percent -- more than twice the euro zone’s pace of 0.3 percent -- while adding 484,000 full-time jobs compared with a year earlier. More flexible employment laws and falling labor costs have helped Spanish companies to grow as they also benefit from external factors including lower oil prices and European Central Bank stimulus.
In the rest of the article, there are warnings that a protracted process of sorting out Spanish leadership may (finally) hurt Spain. Consider, though, the opposite rational choice theory-esque argument: Perhaps it's the lack of government--gridlock at its finest--that is economic actors to thrive in the absence of state interference?

While the cat's away...