International Monetary Fund, European Commission and European Central Bank officials will be in Lisbon today as they start preparing an estimated 80 billion- euro ($116 billion) aid program for Portugal, the third euro- region nation to request a bailout in less than a year.
The EU aims to reach an agreement on the aid package on May 16, three weeks before the country’s June 5 early election, which was prompted by the resignation of Prime Minister Jose Socrates after parliament rejected his deficit-cutting plan.
Portugal’s bid for emergency aid last week opened what European officials say will be the final chapter in the debt crisis that erupted in Greece last year, spread to Ireland and triggered speculation that the 17-nation euro area might not survive in its current form.
“It is expected that the program is completed and approved by both the EU and IMF by mid-May 2011 in order to allow the disbursement of the first tranche ahead of the large funding needs of June,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital, said in a note yesterday.
The next government will need “not only to implement further fiscal consolidation measures but also to implement difficult and potentially unpopular structural reforms, which are likely to target a leaner and more efficient public sector, further labor market reforms, and enhanced competition in goods and services markets,” he wrote.
Icelanders rejected the latest plan to repay the UK and Netherlands some 4bn euros lost in the collapse.
Eight Scottish councils had a total of £46.5m invested in Landsbanki and Glitnir and several UK subsidiaries.
So far they have recovered almost £6.9m from the UK arms of two of the collapsed Icelandic banks.
Hopes of recovering at least some of the outstanding money rose earlier this month when an Icelandic court granted councils priority creditor status.
The decision meant about 90 councils in the UK, including affected authorities in Scotland, would be at the front of the queue for any reimbursement.
However, the picture became more complicated at the weekend when Icelanders rejected in a referendum a negotiated settlement to reimburse the UK.
Amounts owed
North Ayrshire Council, which is owed the largest amount of money in Scotland, said it was waiting to get back £15m.
Doing nothing will not get us anywhere. We would be happy to support any measures that will see us getting any return on the money that is outstanding to us”
Pat Watters
Cosla president
South Ayrshire Council said it was still owed £5m, Moray Council £2m, East Ayrshire Council £2.4m, East Renfrewshire Council £1m and Perth and Kinross Council about £1m.
Scottish Borders Council, which had a total of about £10m invested in the Heritable and Landsbanki banks before the banking collapse, has so far received £2.52m - or just over 50% - of its claim from Landsbanki's UK subsidiary, Heritable.
South Lanarkshire Council has also recovered half of its £2.5m exposure to Heritable but is still owed £5m by Landsbanki.
And East Ayrshire Council has recouped just over half of the £5m it had invested with Heritable and Kaupthing Singer and Friedlander (KSF), both of which are subject to UK law.
The figures emerged as the UK government signalled it was set to resort to legal action to recoup billions of pounds paid out to cover the deposits of British savers in collapsed Icelandic banks.
'Disappointing'
A negotiated settlement to reimburse the UK was rejected for a second time by Icelanders in a referendum at the weekend, a result which the Chief Secretary to the Treasury, Danny Alexander, described as "disappointing".
Mr Alexander told BBC1's Andrew Marr Show: "It looks like this process will now end up in the courts.
"There is a legal process going on and we will carry on through these processes to try and make sure we do get back the money that the British government paid out in past years."
Pat Watters, president of local authority body Cosla, told BBC Scotland's news website that councils would continue to push to get their money back.
He said: "This is a tremendous amount of money. We have to continue to pursue this, using any avenue we can.
"Doing nothing will not get us anywhere. We would be happy to support any measures that will see us getting any return on the money that is owed to us."
A landmark report yesterday said cash-strapped customers would have to pick up the bill for reforming the disgraced industry.
The chairman of the Independent Commission on Banking, Sir John Vickers, warned families to brace themselves for higher charges – even though taxpayer subsidies to the banks are already worth £10billion a year.
Under the heading of “Complacent Europe must realize Spain will be next” Wolfgang Münchau points out that the latest statements from European finance ministers are merely “a metric of the complacency that has characterized the European crisis from the start” while the debt of several peripheral Euro zone countries continues to build up.
Last Thursday, the European Central Bank raised its main rate by a quarter point to 1.25% and more are likely to follow says Münchau. He anticipates the main interest rate to rise to 2% by the end of this year and to 3% in 2013. This trajectory “will have negative consequences for Spain in particular” and not only on economic growth, but also for “the Spanish real estate market since almost all Spanish mortgages are based on the one-year Euribor money market rate, which is now close to 2% and rising”.
Münchau says “Spain had an extreme property bubble before the crisis, and unlike in the US and Ireland, prices have so far fallen only moderately” and forecasts prices would have to fall by “another 40% from today’s level”. He adds that in “terms of supply conditions Spain is more similar to the US and I have yet to hear an intelligent reason why Spanish real house prices should be any higher today that they were 10 years ago, and indeed why they should keep on rising”.
More important the number of vacant properties is about one million, “which means that the market will suffer from oversupply for several years”. This will be the driver of further price declines given the stress in the system: recession, high unemployment, a weak financial sector, higher oil prices and rising interest rates.
Meantime “falling house prices and rising mortgage payments are bound to push up the still moderate delinquency rates and the number of foreclosures”. This will then have an impact on the balance sheet of the Cajas (regional savings banks) since their balance sheets carry all property loans and mortgages at cost.
Münchau adds that as default rates rise, the savings bank system will need to be re-capitalized to cover the losses. “The Spanish government implausibly estimates the re-capitalization need to be below € 20bn, while other estimates put the number at between € 50bn and € 100bn. The assets most at risk are loans to the construction and real estate sector, €439bn as of end-2010”. Spanish banks also have an additional exposure of €100bn to Portugal.
However there are also good news says FT: under a worst-case scenario, Spain would still be solvent since the public sector debt-to-GDP ratio was 62% as of end-2010, which according to Ernst & Young, in its latest Euro zone forecast, projects the debt-to-GDP ratio to increase to 72% by 2015, still below the levels of both Germany and France.
But the Spanish private sector debt-to-GDP ratio is 170%. Münchau says that the current account deficit peaked at 10% of GDP in 2008, but remains unsustainably high, with projected rates of more than 3% until 2015. “This means that Spain will continue to accumulate net foreign debt and its net international investment position – the difference between external financial assets and external liabilities – was minus € 926bn at the end of 2010, according to the Bank of Spain, or almost 90% of GDP.
Münchau concludes that “if my hunch on the Spanish property market proves correct, I would expect the Spanish banking sector to need more capital than is currently estimated. It is hard to say how much because we are well outside the scope of forecasting models. When prices drop so fast, there will be much endogenous pressure that no stress test could ever capture”
Ex-prime minister Gordon Brown admitted that he made a "big mistake" in not seeking tighter regulations on banks in the lead up to the financial crisis.
The former leader told a conference in the US that he had not fully appreciated how "entangled" the global financial system had become when establishing the Financial Services Authority (FSA), the country's regulatory body.
"We set up the FSA believing the problem would come from the failure of an individual institution," Brown said. "That was the big mistake. We didn't understand just how entangled things were.
"I have to accept my responsibility."
New Chancellor of the Exchequer George Osborne has announced plans to break up the FSA and hand more regulatory power to the Bank of England.
Brown said he believed the will to tighten regulation was weakening in the face of lobbying by the financial sector.
"I do believe we're going back to a race to the bottom," he warned.
"There should be an international agreement, otherwise you'll just have banks threatening to move from one country to another," continued Brown.
"Britain was under relentless pressure from the City (Britain's financial centre) that we were over-regulating. All through the 10 to 15 years, the battle was not that we regulated too little, but that we regulated too much," he added.
The distressed debt market in Europe is set to outstrip the U.S. for the first time as the region’s sovereign crisis forces banks to sell $2 trillion of underperforming assets, Strategic Value Partners LLC said.
“The opportunity set in Europe is very attractive and rich,” Victor Khosla, founder of the Greenwich, Connecticut-based distressed-debt hedge fund manager, said in a phone interview. “It far exceeds the U.S. for the first time.”
Strategic Value Partners, which oversees $4 billion, is among hedge funds eyeing Europe as the fallout from the credit crisis and governments’ austerity measures trigger fire sales. Mark Unferth, head of distressed debt at London-based CQS U.K. LLP, is boosting investment in Europe and expects rivals to do the same, he said in an April 6 interview. New York-based KKR & Co. said March 1 it hired Mubashir Mukadam to head its push into the European market.
By comparison, U.S. banks have announced they need to sell $800 billion of assets since the credit crisis, Strategic Value Partners calculations show.
Distressed debt typically yields at least 10 percentage points more than government bonds. Hedge funds dedicated to buying the debt earned an average 4.1 percent return this year after reaping 23 percent last year, according to Singapore-based data provider Eurekahedge Pte.
‘American Invasion’
Distressed-debt funds seek to profit by buying assets at below their face value, providing high-yield financing which could give rights to a company’s shares and opportunities to restructure it or install new management before selling it at a higher value.
The second wave of restructuring in Europe will require “hardcore, true restructuring skill” handling debt-for-equity swaps and overhauling corporate operations, Khosla said. Lenders wrote off 6.5 billion euros ($9.4 billion) of senior loans as defaults peaked in 2009, according to Fitch Ratings.
Strategic Value Partners has 50 investment professionals in London and Frankfurt and has invested about $6 billion in European distressed debt since it was set up in 2002.
“Europe is not a market for everyone. Over the years we’ve seen American invasion followed by American retreat from those failing to grasp the how to do business in this region” including knowledge of different legal regimes from country to country, Khosla said. “Given the amount of the legacy non- performing assets that needs to be cleaned up, this restructuring cycle is going be at least three to five years and even longer for the peripheral countries because we don’t expect to see a sharp recovery in the economy there.”
Bank of Ireland said April 4 hired Deutsche Bank AG to sell most of its project finance business of U.K. infrastructure loans. Ireland’s central bank instructed four lenders on March 31 to raise 24 billion euros after publishing the outcome of the banks’ stress tests.
“The spate of equity fund-raising by European banks recently is positive for corporate debt restructuring because it will allow banks to be able to start taking writedowns on these assets,” Khosla said.
.IRISH LIFE and Permanent declined 59 per cent on the stock market after the Government said that it may take control of the company, which has been told it must raise €4 billion by the Central Bank.
The shares fell by 73 per cent at one point, the biggest fall in the stock for more than 17 years, before closing at 17 cent, valuing the company at €46 million.
The company, which owns Permanent TSB bank, said it was exploring a stock market flotation of its pensions and investments, and fund management businesses to raise some of the €4 billion.
Dates in July or September are being considered for the flotation, a company spokesman said.
The company, the only bank to avoid a Government cash bailout since the crisis began, will shortly appoints advisers on the sale.
The businesses to be sold include Irish Life Investment Managers, Irish Life retail and corporate businesses, financial services company Cornmarket and the 30 per cent stake in insurer Allianz.
Irish Life and Permanent’s subordinated debt was downgraded by ratings agency Moodys in the expectation that bondholders would be forced to take losses to help meet the capital bill.
Irish Life and Permanent was “caught in the cross fire” in the Government’s decision to over-capitalise Bank of Ireland and AIB, said Gerry Hassett, chief executive of Irish Life retail business.
The company was told last year it needed to raise €240 million and within six months “the rules of the game had changed and we needed €4 billion”, he said.
Irish Life will be sold before any cash injection by the Government.
Mr Hassett said that Irish Life had an “embedded value” of €1.6 billion and that it planned to float the business unit in the Dublin and London stock markets.
Senior management, including chief executive Kevin Murphy and finance director Dave McCarthy, are expected to move with Irish Life when the business is sold.