Wednesday 01 February 2012

Unicredit are tendering for their perpetuals. Where does the cash come from? The ECB? Pay 1% to reduce the payment of 10%! Also Unicredit made a large rights offering.

The question is whether there is any point selling back to them? The bank is now in a better position (hence price moved from 50 to 72), but is there now only a small chance of it not paying the perpetual? Fewer investors may hold the product, hence less income payments need to be made. Bank better capitalised. Depends also what other banks do - if it becomes socially acceptable to not pay your perpetuals! There can be a cascade effect.

Chris also suggests that banks have been using ECB funding to buy their soverign debt. Hence another yield pick up. Good credit exhibits almost a flat yield curve, hence the old borrow short lend long is not profitable. Sovereigns almost MUST be used to generate profit on cheap credit by the ECB. Banks capitalise themselves via their security purchases, governments receive funding, the ECB gets paid back. Confidence is returned to the system. Austerity takes place to reduce the deficits so debt does not increase. But where will the growth come from to reduce the current debt level?

That will have to be achieved via inflation. International banks are achieving this by lending to emerging markets. Loans going bad in DM replaced by high interest loans in EM. We hope Citigroup, Santander etc don't loss the plot and reduce underwriting standards in those areas focusing only on the growth. Then same problem in a different region! Many corporates are getting access to the growth via EM. But how does a country achieve that? How does it attract the profits from their home corporates? TAX THEM MORE! CAPITAL CONTROLS! PROTECTIONISM?

US GDP Q4 2011 strong contribution from inventories. Gavekal say because lots of imports. But may have the effect of having lower Q1 2012 GDP as the inventory gets reduced, hence less buying, less activity in general. Construction spending increased 10%. Not much investment in equipment. USA needs an investment led boom, hence this would need to change. The consumer was quite strong. But note saving rates are falling again. Better GDP results when remove govt. Hence provate sector taking up the slack from reducing govt footprint. This is excellent news for the USA.

When reduce govt spending and provate sector is not growing, then reduce tax receipts as well as growth from less govt spending. Hence increasing the budget deficit. This can create a debt trap, whereby the cost of borrowing can increase. This is a problem if have a large debt load and large re financing tranches coming due. All this because not competitive. Need to reduce the cost of labour, then can create jobs from foreign capital coming in. Or be a more efficient user of capital if govt receives capital. But cost of borrowing increasing, so the return needed must increase if to profit from the capital. Need to restructure the economy as capital went to the wrong sectors. Either because interest rates were too low, or new laws gave incentives to move into new areas/sectors, or the economy simply was not innovative enough.

Telecom not being displaying defensive characteristics in Europe. Competition and regulatory price pressure. US has been a little better. Europe is opening up now. US done many years ago I believe. We may see such bahaviour in a number of sectors in Europe as sectors open up Europe wide. Especially those that were government protected: telecoms, utilities. In Asia low penetration and the resulting strong growth has helped their telecom sector.