Iraq Is Planning for a $5 Billion Bond Issue

Iraq is planning for a $5 billion sovereign bond issue. The government has hired JPMorgan, Citibank and Deutsche Bank to arrange its first debt sale in nine years, to cover a budget deficit caused by low oil prices and its conflict with Islamic militants. Iraq plans to obtain a sovereign credit rating and is approaching rating agencies as it prepares for a $5 billion bond issue. Iraqi officials recently met with the three banks and credit rating agencies — Fitch Ratings and Moody’s Investors Service. In early June, the International Monetary Fund (IMF) reached a staff level agreement to provide a $833 million loan under the Rapid Financing Instrument (RFI). Subject to IMF management approval, the agreement is expected to be submitted to the IMF Executive Board for consideration in July. Iraq has an outstanding U.S. dollar bond maturing in 2028; panic selling late last year as oil prices plunged pushed its yield to a record high of 10.49 percent from around 7.2 percent in September, but it has since dropped back to around 8 percent. The economy contracted by 2.1 percent in 2014, primarily due to the conflict with ISIS, and is expected to achieve only a modest recovery of 0.5 percent in 2015. With low oil prices, export revenues have contracted, pushing the current account into a deficit expected to reach 8 percent of GDP in 2015. The country’s need for cash is acute; the government has projected […]

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Kurdistan Eyes International Debt Financing

The Kurdistan Regional Government (KRG) is moving forward with a plan to raise money for stalled infrastructure projects by issuing bonds. Bloomberg reported that the KRG has picked Goldman Sachs International and Deutsche Bank AG for a potential bond sale. Kurdistan, a semi-autonomous region of northern Iraq, needs money to meet a growing security bill, to pay public-sector employees and to fund much-needed infrastructure development. In purely economic terms, Kurdistan could be an attractive investment. It sits on a quarter of Iraq’s total oil reserves. The Kurdish region holds 45 billion barrels of oil reserves, while the rest of Iraq has 150 billion barrels, the world’s fifth-largest known deposits. The KRG started crude exports by pipeline through Turkey in 2014. The efforts to sell crude separately from the central government has provoked legal action by authorities in Baghdad. There are some other key outstanding issues that needs to be clarified for attracting investments. The KRG wants the region to become an independent state. Its neighbours — Iran, Turkey and most importantly the government in Baghdad — are opposed to the region’s secession. Its tense relations with the Iraq central government mean there are several grey areas about how exactly Kurdistan would raise any funds — or even if it can do so without Baghdad’s authorisation. This uncertainty also extends to the servicing of any debt and whether or not the regional government will need either explicit or implicit approval from the […]

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Six Banks Fined $6 Billion Over Rigging of Forex Markets

Six of the world’s biggest banks will pay nearly $6 billion — bringing the total sums paid in connection with alleged forex manipulation to about $10 billion. These banks are also among the world’s biggest foreign-exchange traders. Five of them agreed to plead guilty to charges tied to a currency-rigging probe as they seek to wind down almost half a decade of enforcement actions. Separately, the Federal Reserve fined Bank of America Corp $205 million for unsound practices in foreign exchange. Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc agreed to plead guilty to conspiring to manipulate the price of US dollars and euros in settlements with the Department of Justice. UBS Group AG agreed to plead guilty to charges related to interest-rate manipulation. They were the first to cooperate with antitrust investigators and were granted immunity in the currency probe. Between December 2007 and January 2013, forex traders at Citi, JPMorgan, Barclays, RBS  and a few other big banks colluded by sharing proprietary information on pending client orders ahead of the 4 p.m. fix. This information sharing was allegedly done through instant-message groups – with catchy names such as “The Cartel,” “The Mafia,” and “The Bandits’ Club” – that were accessible only to a few senior traders at banks who are the most active in the forex market. The audacious nature of the dealing desks is revealed in the chatroom transcripts as one employee at Barclays remarks, […]

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Allowing Banks to Fail

Shortly after the financial crisis broke out in 2008, regulators around the world embarked on a regulatory reform in order to prevent such a crisis from happening again. This regulatory reform is as complex and multi-layered as the crisis itself. Many observers wish there was a silver bullet that would solve the crisis with one clean shot. But, there is no such silver bullet. Too Big to Fail It refers to banks that are so big, so interconnected or so important that their failure might bring down the entire financial system. Consequently, the government has an incentive to step in and bail out these banks in order to prevent a systemic meltdown. Banks that were deemed “too big to fail” therefore operated with implicit government support that was provided free of charge. Such support, however, can induce banks to engage in risky transactions. If things go well they take the profit, but if things go wrong the taxpayer foots the bill. Obviously, this is a less than optimal situation from any point of view but the banks’. How can this problem be solved? The first step is to reduce the likelihood of a large bank failing. To this end, regulation has, among other things, imposed stricter capital requirements in general and introduced surcharges for systemically important banks. But capital can only shield against losses up to a point. A system that entirely prevents the failure of banks is neither possible […]

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Peer-to-Peer Lending Disrupting the Banking Model

bii-how peer to peer lending works

Banks have historically handled most consumer and small business lending because they have the resources to assess a borrower’s creditworthiness, and the regulatory approval to fund loans. However, this model has some key inefficiencies — interest rates are not individualised, the costs of underwriting loans are high, loan decisions can take months, and small & micro enterprises in particular have generally […]

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The Negative Rate Mortgage Is Now A Reality

With negative interest rate policy (NIRP) raging in the eurozone and over €1.9 trillion in European government bonds trading with negative yields, many were wondering whether this generosity will spill over to other debtors. Following consecutive rate cuts during this year by the Danish Central Bank, local Danish banks — Nordea Credit, Realkredit Danmark — are now offering a mortgage with a negative interest rate! Negative interest rates aren’t a new phenomenon in Europe, but they’ve been limited to inter-bank borrowing. FT reported Ms Christiansen received a negative interest rate for her three-year loan, meaning the lender — Realkredit Danmark, a part of Danske Bank — is paying for her to borrow money. The interest rate of minus 0.0172 per cent — which equates to her receiving about DKr 7 each month from the bank — is just one sign of the “Through The Looking Glass” effects of extreme central banking measures in Scandinavia. The Scandinavian central banks are going pretty far in NIRP. Sweden’s Riksbank became the first central bank in the world to take its main policy rate — the so-called repo rate — into negative territory. Denmark’s Nationalbanken in turn cut its deposit rate — the amount it pays or in this case charges banks for placing money with it — four times at the start of this year to a world record low of minus 0.75 percent. On April 8th, Switzerland became the first country to sell 10-year […]

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TLAC for Global Systemically Important Banks

On November 10, 2014 the Financial Stability Board (FSB) issued a long-awaited Consultative Document “Adequacy of loss-absorbing capacity of global systemically important banks in resolution” that defined a global standard for minimum amounts of Total Loss Absorbing Capacity (TLAC) to be held by Global Systemically Important Banks (G-SIBs). TLAC is meant to ensure that G-SIBs have the loss absorbing and recapitalization capacity so that, in and immediately following resolution, critical functions can continue without requiring taxpayer support or threatening financial stability. The TLAC proposal is one of the final components of a long-standing reform effort laid out in 2010 by the FSB to limit the probability and impact of the failure of large global systemically important financial institutions, i.e., ending the too-big-to-fail (TBTF) phenomenon. At its core, TLAC bolsters capital and leverage ratios, thereby creating a greater capital cushion intended to further pre-empt any need for a taxpayer-funded bail-out. At the global level, the G20 have agreed to a proposal that G-SIBs will have to fulfill in future regarding their capital structure. In particular, these banks will need to ensure a minimum amount of TLAC, which may be as high as 20 percent including the minimum capital requirements and the G-SIB buffer. This will make global banks more resilient, and it will allow for their orderly resolution. TLAC will apply in addition to the capital requirements set out in the Basel III framework, including the countercyclical, G-SIB and other capital […]

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Negative-Yield Bond Universe Is $2.35 Trillion!

As part of its €1.1 trillion quantitative easing plan, the European Central Bank (ECB) will buy government bonds due between two- and 30-years, including those with negative yields, President Mario Draghi said in January. The bond buying plan has left $1.9 trillion of the euro region’s government securities with negative yields. Germany sold five-year notes at an average yield of minus 0.08 percent on February 25, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020. By the next day, German notes with maturity out to seven years had sub-zero yields — reached minus 0.017 percent. The rates on seven other euro-area nations’ debt were also negative. The German bond markets are leading this historical phenomenon — 88 of the 346 securities in the Bloomberg Euro zone Sovereign Bond Index have negative yields. Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index. The seemingly illogical willingness of investors to pay issuers to borrow their money is neither irrational nor driven by just noncommercial considerations (such as regulatory requirements or forced risk aversion). As the ECB prepares to start its own large-scale purchasing program next week, some investors believe they could make capital gains on such negative yielding investments. The ultra-low interest rate regime is likely to persist for now and this has caused challenges for banks. A growing […]

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It Pays to Turn Money Away

Traditional bank runs were driven by massive withdrawals of deposits by customers. On February 24, JPMorgan Chase & Co. (JPM) announced plans for an inverted bank run — it will push certain customers to withdraw what one executive has described as bad deposits. Central banks around the world have pushed since the crisis to increase the minimum amount of capital that banks hold, in the hope that it will protect banks in the case of a crisis. Banks can increase their capital by raising money from shareholders or retaining profits, but this generally makes the cost of doing business more expensive. Bigger banks have always had to hold more capital, but in December the Federal Reserve Bank proposed new surcharges for the largest, most systemically important banks, and indicated that JPM would face a higher surcharge than any other institution. The so-called GSIB surcharge is expected to force JPM to hold 4.5% more capital than a standard bank. The way this surcharge will be calculated under the rules proposed by the Fed in December “heavily penalizes” non-operational deposits. JPM says it plans to reduce such deposits by up to $100 billion by the end of the year. The unwanted funds are primarily “non-operational deposits” from financial institutions. That is, deposits that aren’t connected to a company’s daily cash management, payment services or other banking activities. According to JPM’s CFO: so-called “non-operational deposits”, which account for about $200 billion of JPM’s […]

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Bolstering Financial Inclusion

Financial deepening has accelerated in emerging market and low-income countries over the past two decades. The record on financial inclusion, however, has not kept apace. Large amounts of credit do not always correspond to broad use of financial services, as credit is often concentrated among the largest firms. Moreover, firms in developing countries evidently continue to face barriers in accessing financial services. The lack of financial inclusion contributes to persistent income inequality and slower growth and lack of access to basic financial services is still a major challenge in developing countries. Large gaps exist in worldwide access to finance. 58% of the firms in developing countries and only 20% of those in low-income countries have access to bank credit. 51% of firms in advanced economies use a bank loan or line of credit as compared with 34% in developing economies. Given that financial inclusion is multi-dimensional, involving both participation barriers and financial frictions that constrain credit availability, policy implications to foster financial inclusion are likely to vary across countries. Small and medium enterprises (SME) continue to face barriers that further impede access to finance, such as high costs, high collateral requirements, travel distance, and onerous paperwork. This forces individuals to rely on their limited savings to become entrepreneurs. Once established, these enterprises tend to depend on self-financing to meet investment needs. This, in turn, limits the overall size of the firm, the ability to innovate, and productivity. To examine how […]

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