The sharp sell-off of Italian sovereign debt in response to the new populist government’s anti-austerity budget has caused familiar fears to resurface over the health of the country’s banks, the Financial Times reported. Italian lenders hold €387bn of domestic sovereign debt, according to the European Central Bank, leaving them heavily exposed as the country’s borrowing costs test five-year highs. Filippo Alloatti, senior credit analyst at Hermes, said the country’s banks were “super long” on Italian government debt, which accounts for between 13 and 15 per cent of their total assets. If higher yields persist, banks will be forced to reprice their vast holdings of Italian sovereign bonds and seek fresh sources of capital, predicted Mr Alloatti. Such heavy exposure has revived the spectre of the “ doom loop”, which describes the inextricable link between Italy’s heavily indebted public finances and its banks. Read more. (Subscription required.)
British clothing retailer Karen Millen has bought parts of the Coast fashion brand, which has gone into administration, PricewaterhouseCoopers (PwC) said on Thursday, Reuters reported. Mike Denny, joint administrator and PwC director, said 24 Coast retail stores were not included in the sale to Karen Millen and would thus result in job cuts. PwC said Karen Millen has retained 600 jobs at Coast. “The businesses had been facing financial difficulties due to structural challenges in the retail space and specifically the concession partner market, as well as a softening of demand for occasion wear,” Denny said in a statement. “This sale puts the ongoing business on a firmer financial footing. Karen Millen will be working with the existing management team to continue to grow and develop the new business.” Read more.
Etihad Airways and Abu Dhabi's Department of Finance are likely to reject calls for a meeting with disgruntled bond investors in the belief that their complaints have no legal merit, sources close to the matter told Reuters. In 2015 and 2016 Etihad issued $1.2 billion in bonds in a partnership with airlines it partly owned at the time, including Alitalia and Air Berlin, the International New York Times reported on a Reuters story. The bonds are now in default because the European airlines, which are now insolvent, have not honoured their part of the obligations. The sources said that a group of international institutional creditors have complained to Etihad and the Abu Dhabi Department of Finance that, when the bonds were marketed, Etihad had promised to support the other airlines to make them profitable. “By definition, that means it would have supported the airlines to cover their debt obligations,” one of the sources said. Read more. (Subscription required.)
The owner of Britain’s Patisserie Valerie café chain warned on Thursday that it is in danger of collapse if it cannot urgently raise capital after discovering a potential accounting fraud, Reuters reported. Patisserie Holdings said an investigation had found a “material shortfall” between the reported accounts of the London-listed company and its true financial health. “Without an immediate injection of capital, the directors are of the view that there is no scope for the business to continue trading in its current form,” it said in a statement. Patisserie Holdings, whose cafes are best known for their range of cakes and employ about 2,500 staff, added that it was working with its advisers to assess its options. The company had said on Wednesday that its directors first became aware of “significant, and potentially fraudulent, accounting irregularities” a day earlier. Read more.
Restructured foreign currency loans in Turkey will be converted to Turkish lira at the central bank exchange rate in force on the day of restructure, a presidential decree said on Thursday, a move that could damage banks if the lira continues to fall against the dollar, Reuters reported. The decree published in the Official Gazette allowed the day’s lira rate to be used in companies’ restructuring of forex loans as private sector debt continues to grow. Earlier this week, Turkey’s TBB banking lobby called on its members to allow corporate borrowers to restructure some short-term foreign currency loans, a move that would potentially throw a lifeline to debt-burdened companies hit by the country’s currency crisis. Read more.
European Commission Vice President Jyrki Katainen urged Italy on Thursday to submit a draft budget in line with commitments and warned of risks for Italy and other euro zone states, Reuters reported. Italy’s eurosceptic government raised market concern when it announced two weeks ago a plan to raise its headline budget gap to 2.4 percent of gross domestic product in 2019 and flout fiscal targets agreed with euro zone peers. “The situation is very fragile,” Katainen told reporters when asked about Italy’s budgetary plans and initially negative market reaction. He said no one wanted financial instability that could hit Italy and other euro zone countries “that may suffer from contagion risks”. On Wednesday, the governor of the Bank of Greece said a drop in Greek bank shares was caused by external factors, as analysts blamed Italy’s row with the EU over its budget as the main cause of market pressure on Greek lenders. Read more.
The International Monetary Fund launched formal bailout talks with Pakistan on Thursday, and IMF managing director Christine Lagarde said she would require “absolute transparency” of Pakistan’s debts, including those owed to China, Reuters reported. She said such disclosures were necessary to determine the debt sustainability of countries seeking IMF loans. The requirements are likely to shine a spotlight on the extent, composition and terms of Pakistan’s debts to China for infrastructure projects as part of Beijing’s massive Belt and Road building program. China has pledged some $60 billion in financing to Pakistan for ports, railways and roads, but rising debt levels have caused Islamabad to cut the size of the biggest Belt and Road project by some $2 billion. “In whatever work we do, we need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country,” Lagarde told a news conference when asked about Pakistan’s debts to China. Read more.
Italian banks face a 102 billion-euro headache, just when they’re least ready to deal with it, Bloomberg News reported. That’s how much they’ve lent to the country’s stumbling construction companies, according to data from the Bank of Italy. But with Astaldi SpA readying plans to restructure as much as 2.5 billion euros of debt, three of the top six Italian builders are now either insolvent or negotiating with creditors. The construction sector accounts for the highest default rates in Italy, the data show. Italy’s banks are already reeling from the impact on their capital levels of soaring government bond yields. They’re also sitting on a 260 billion-euro pile of non-performing loans -- the biggest in the European Union -- left over from the last financial crisis and recession. With total loans held by Italian banks exceeding 2 trillion euros, losses by the builders are unlikely to pose a systemic risk on their own but the problems in the sector couldn’t have come at at worse time. Read more.
It was good while it lasted for Europe’s construction companies. The state kept them in work with a steady supply of contracts, local banks provided the financing and profits rose. Then came the financial crisis and the longest recession of the postwar era leaving states unable to spend and banks unwilling to lend, Bloomberg News reported. Much of the once-thriving industry has been pushed to the brink. The Seville, Spain-based construction and engineering company Abengoa, specializing in renewable energy plants, is being overhauled less than two years after a 9-billion euro ($10 billion) debt restructuring. The company is seeking support from creditors to restructure a rump of its old debt and to get 297 million euros of new funding. The Madrid-based builder Aldesa shelved a 300 million-euro bond issue in May with management blaming fickle markets amid mounting investor concern for the health of the building sector. Read more.
HNA, the troubled Chinese group, is in advanced talks with Canada’s Brookfield Asset Management to sell Swissport International, the air services company, according to people briefed about the matter. A deal would be the latest for the Chinese aviation-to-finance conglomerate, which has sold an estimated $18bn worth of assets this year as it is desperately trying to ratchet up funds to meet its domestic debts, the Financial Times reported. Although the talks are fairly advanced there are other potential buyers in the mix and no final decision had been taken by the group’s upper echelons, said one person close to HNA. The sale of the company that provides ground services and cargo handling follows HNA’s decision to pull the initial public offer of Swissport. Brookfield has been on a multibillion-dollar spree over the past year as the Canadian-listed company is bolstering its property portfolio. Read more. (Subscription required.)
A recurrent debate since the eurocrisis has been whether stability tools should share risk among Member States or, instead, segregate risks within individual countries. As the eurozone discusses — and postpones — genuine risk-sharing measures, such as European deposit insurance, it’s important to look back at when risks were shared, and who actually benefited. The common narrative is that rescue programs have helped deeply troubled countries avoid sovereign bankruptcy or widespread bank failures, the Financial Times reported in a commentary. But, by avoiding extreme outcomes, these programs also protected the banks of the core countries — Germany and France, in particular — that had accumulated huge exposures to the periphery before the crisis. At the time, risk sharing (however unpleasant) was the best available option for the governments of the core countries. Read more. (Subscription required.)
Greece’s central bank governor has blamed Italy’s market turmoil for a drop in the share prices of Greek banks, saying that the falls “are not related to the soundness of Greek banks”. Italian government bonds have seen a fresh sell-off in recent days, as investors mull the growing likelihood that Rome will face-off against Brussels over a budget-busting spending plan, the Financial Times reported. In the past two weeks the yield on 10-year Italian debt has risen by 80 basis points, to hit 3.712 per cent — its highest level since early 2014. The correlation between Italian and Greek bond yields has increased notably in recent months, with Italy’s debt beginning to trade much more like that of the eurozone’s most financially troubled member than other periphery nations. The turbulent conditions have hit European banks across the continent, as declines in the value of banks’ holdings of Italian debt eat away at their capital base in a dangerous spiral known as the ‘doom loop’. Read more. (Subscription required.)
South Korea’s Hyundai Merchant Marine is getting another $5 billion in state funding to finance a series of new orders for megaships as the company tries to compete with bigger Asian and European rivals in a difficult container shipping market. HMM, the country’s de facto flag carrier after the collapse of Hanjin Shipping Co. in 2016, will spend $2.8 billion to buy 20 large container vessels from South Korean shipbuilders, The Wall Street Journal reported. The rest of the money will likely be used to buy container terminals, according to people involved in the matter. The state intervention to prop up the struggling container ship operator reflects the willingness of Asian governments to stand behind national carriers that move billions worth of exports to Western markets and the local shipyards that build their vessels. Read more. (Subscription required.)
Chinese corporate bond defaults will likely continue to rise next year due to daunting refinancing costs, with defaults expected to concentrate on the country’s cash-starved private sector, Fitch Ratings said on Wednesday, Reuters reported. Availability of credit for firms to refinance their borrowings remains tight despite the central bank’s monetary policy easing steps, as commercial banks continue to be cautious in lending to private companies and non-strategic, financially wobbly state-owned enterprises (SOEs), Fitch said. As of the end of September, 25 corporate issuers had defaulted on payments for 52 onshore bonds worth a total of 60.6 billion yuan ($8.76 billion), according to data compiled by Reuters. The onshore default rate was 0.23 percent in the first half, down from 0.37 percent in 2017 and a peak of 0.66 percent in 2016, thanks to improved conditions in the commodity sector and a recovery in prices, Fitch said. Read more.
China plans to increase the number of companies it deems systemically important financial institutions, people familiar with the matter said, a sign that policy makers are stepping up crisis-prevention efforts as the nation’s debt burden swells to unprecedented levels, Bloomberg News reported. Regulators led by China’s central bank will initially shortlist at least 50 of the country’s largest lenders, insurers and brokerages as possible SIFIs, said the people, asking not to be identified because the matter is private. Firms that receive the designation will be subject to extra capital requirements, and may face additional rules on leverage, risk exposure and information disclosure, the people said. Regulators currently consider about 20 banks to be systemically important, one of the people said. Read more.
The Serious Fraud Investigation Office (SFIO) has narrowed on five arms of Infrastructure Leasing & Financial Services (IL&FS) that may have been involved in fund diversion and mismanagement, the Economic Times reported on Wednesday. Indian government took control of the debt-laden IL&FS last week after defaults on a string of debt obligations triggered wider concerns about risks in the country’s financial sector, Reuters reported. The five companies under SFIO probe are IL&FS Transportation Networks Ltd, IL&FS Financial Services Ltd, IL&FS Energy Development, IL&FS Tamil Nadu Power and IL&FS Engineering and Construction Company, the paper said. The five firms constitute for more than 50 per cent of the entire group’s revenue and may have diverted funds in projects that were worth 300 billion rupees ($4.04 billion), ET reported, citing two government officials. Read more.
Debt stress in Zambia is set to escalate next year as the burden of hefty borrowings from China starts to weigh, throwing the copper-exporting African nation into a struggle to avoid default on its hard currency debt, analysts said. Opinions diverge on whether default can be evaded, partly because certain factors are subject to both market fluctuations and political uncertainties, the Financial Times reported. But stress is building as the kwacha, the national currency, depreciates against the US dollar, making repayments of an official $9.4bn in debt more expensive in local currency terms. “My view is that Zambia will not default on its eurobonds, but the country has a few very difficult years ahead,” said Gregory Smith, analyst at Renaissance Capital, an investment bank. “The government has presented next year’s budget, but we think it falls short of an adequate survival plan,” he added. Read more. (Subscription required.)
The World Bank and IMF have endorsed Zimbabwe’s plan to clear $2.2 billion in arrears to international creditors, the finance minister said on Wednesday, but U.S. sanctions may still prevent fresh loans to support the rebuilding of a shattered economy, Reuters reported. President Emmerson Mnangagwa has promised to revive the economy, pay foreign debts that the country has defaulted on since 1999 and end the international pariah status that Zimbabwe acquired under Robert Mugabe’s near four-decade rule. But the economy remains in crisis with an acute shortage of dollars, the collapse in the value of the country’s parallel ‘bond note’ currency and many businesses struggling to operate. Paying debt arrears could potentially open access to financing from the International Monetary Fund, World Bank and other development institutions, but the United States, which is the bank and fund’s largest member country is an obstacle. Read more.
The Bank of England and the financial services industry on Tuesday pressed the EU to urgently tackle legal uncertainty surrounding vast amounts of derivatives because of Brexit, the Financial Times reported. Calling for “timely action” by EU authorities, the BoE’s Financial Policy Committee said if the UK crashed out of the bloc without a withdrawal agreement it risked rendering void £41tn of derivatives. The International Swaps and Derivatives Association, which represents banks and other financial institutions, warned that a no-deal Brexit would have “immediate adverse impacts” on these financial contracts. Derivatives such as swaps are heavily used by companies across different sectors — ranging from energy to retail — to hedge their exposure to changes in interest rates or the value of currencies and commodities. These contracts are typically issued by banks, and the companies that buy the derivatives make interest payments on them. Read more. (Subscription required.)
Brussels has been “overly generous” to Italy’s government, allowing it to flout the EU’s budget rules last year, the head of an independent watchdog has said, fuelling criticism of the European Commission’s policing of the bloc’s public finances, the Financial Times reported. Niels Thygesen, the chair of the European Fiscal Board, told the Financial Times the European Commission had gone “beyond” the necessary flexibility allowed to Italy during the country’s budget negotiations with Brussels in 2017. Mr Thygesen’s comments come as Rome’s populist government prepares to deliver its first draft budget to the EU next week. Giovanni Tria, Italy’s finance minister has targeted a deficit of 2.4 per cent of GDP — a level that will smash through commitments to reduce the deficit to an EU-mandated target of 0.8 per cent in 2019. The European Fiscal Board is an independent watchdog designed to scrutinise how the commission applies its “Stability and Growth Pact” framework. The rules require all eurozone members to keep their deficits below 3 per cent and reduce their debt ratio towards 60 per cent of GDP or face the possibility of financial punishment. Read more. (Subscription required.)