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        chocolat roses - French rose breeder NIRP International has created a chocolate rose called the Terra Nostra.                                                                                                                

Pension Funds Are "Compromising Their Solvency" OECD Warns
By : Zero Hedge Published on : 6/28/2015 11:15:00 PM

Four months ago in The Global War On Pensioners, we highlighted the impact perpetually suppressed risk-free rates are having on pension funds. The critical point is this: the lower the investment return assumption (the assumed discount rate), the higher the present value of pension liabilities, meaning funds must either concede that liabilities have ballooned in the low yield environment, or take greater risks to justify elevated investment return assumptions.

This state of affairs has exacerbated an already bad situation for many public sector pension funds in the US and has helped fuel a shift towards alternatives by funds determined to maintain investment return assumptions despite the fact that ZIRP and NIRP are making those assumptions more unrealistic by the day. For a detailed recap, see the following:

For more on the risks posed by the intersection of pension funding gaps and persistently low rates, we go to the OECDs Business and Finance Outlook (first discussed herein the context of bond market liquidity last week):

The relationship between the liabilities of pension funds and annuity providers and the assets backing those liabilities (i.e. the funding ratio) determines the financial situation of these institutions, including their solvency. Interest rates play a role for both the asset and the liability side of the balance sheet of these institutions and understanding how interest rates affect both is essential to understanding the potential impact of low interest rates.

Low interest rates affect the liabilities of pension funds and annuity providers because the liabilities depend on the discount rate used to calculate the present value of future promises. The discount rate used to calculate the net present value is generally assumed to be the risk-free rate, usually the long-term government bond yield (e.g. the 10-year government bond yield). Other things equal, when government bond yields decline, the estimated value of future liabilities increases.

The impace of a reduction in interest rates on the value of the assets backing the liabilities of these investors depends not only on the proportion of the portfolio invested in fixed income securities, but also on the valuation methods, and the maturity of those securities.. To the extent that interest rates remain low into the future and the fixed income securities in the portfolio reach maturity, reinvestments into new fixed income securities carrying lower yields would reduce the future value of assets, in proportion with the share of the portfolio invested in fixed income securities. As a result of this lower future value of assets, pension funds’ and insurance companies’ assets might not be sufficient to back up their promises, unless the pension orpayment promise is adjusted to the new environment of low interest rates, low inflation, and growth..

The extent to which pension funds and insurance companies engage in a ‘search for yield’ is the main concern for their outlook. Pension funds may shift their portfolio allocation towards investments that could potentially fetch higher returns but in exchange for an increased overall risk profile for their investment portfolio. As pension funds move into riskier investments in search of higher returns to fulfil their pension promises, they may be seriously compromising their solvency situation in the event of a negative shock (e.g. liquidity freeze).

As you can see from the above, pension funds in the US, Canada, and the UK have moved increasingly into “other” assets over the course of the last decade.

What does the OECD define as “other” assets you ask? Here’s the list: “loans, land, unallocated insurance contracts, hedge funds, private equity funds, other mutual funds, and other investments.”

If that sounds risky to you, or if you have doubts about whether pensioners would knowingly stake their retirements on the performance of alternative assets that probably have no place in a conservative portfolio, just know that you’re not alone. We’ll leave you with the following warning from OECD Secretary GeneralAngel Gurra:

Pension funds and life insurers are feeling the pressure to chase yield and to pursue higher-risk investment strategies that could ultimately undermine their solvency. This not only poses financial sector risks but potentially jeopardizes the secure retirement of our citizens.








Pension Funds Are "Compromising Their Solvency" OECD Warns

Four months ago in “The Global War On Pensioners”, we highlighted the impact perpetually suppressed risk-free rates are having on pension funds. The critical point is this: the lower the investment return assumption (the assumed discount rate), the higher the present value of pension liabilities, meaning funds must either concede that liabilities have ballooned in the low yield environment, or take greater risks to justify elevated investment return assumptions. 

This state of affairs has exacerbated an already bad situation for many public sector pension funds in the US and has helped fuel a shift towards “alternatives” by funds determined to maintain investment return assumptions despite the fact that ZIRP and NIRP are making those assumptions more unrealistic by the day. For a detailed recap, see the following:

For more on the risks posed by the intersection of pension funding gaps and persistently low rates, we go to the OECD’s Business and Finance Outlook (first discussed here in the context of bond market liquidity last week):

The relationship between the liabilities of pension funds and annuity providers and the assets backing those liabilities (i.e. the funding ratio) determines the financial situation of these institutions, including their solvency. Interest rates play a role for both the asset and the liability side of the balance sheet of these institutions and understanding how interest rates affect both is essential to understanding the potential impact of low interest rates.

Low interest rates affect the liabilities of pension funds and annuity providers because the liabilities depend on the discount rate used to calculate the present value of future promises. The discount rate used to calculate the net present value is generally assumed to be the risk-free rate, usually the long-term government bond yield (e.g. the 10-year government bond yield). Other things equal, when government bond yields decline, the estimated value of future liabilities increases.

The impace of a reduction in interest rates on the value of the assets backing the liabilities of these investors depends not only on the proportion of the portfolio invested in fixed income securities, but also on the valuation methods, and the maturity of those securities.. To the extent that interest rates remain low into the future and the fixed income securities in the portfolio reach maturity, reinvestments into new fixed income securities carrying lower yields would reduce the future value of assets, in proportion with the share of the portfolio invested in fixed income securities. As a result of this lower future value of assets, pension funds’ and insurance companies’ assets might not be sufficient to back up their promises, unless the pension orpayment promise is adjusted to the new environment of low interest rates, low inflation, and growth..

The extent to which pension funds and insurance companies engage in a ‘search for yield’ is the main concern for their outlook. Pension funds may shift their portfolio allocation towards investments that could potentially fetch higher returns but in exchange for an increased overall risk profile for their investment portfolio. As pension funds move into riskier investments in search of higher returns to fulfil their pension promises, they may be seriously compromising their solvency situation in the event of a negative shock (e.g. liquidity freeze).

As you can see from the above, pension funds in the US, Canada, and the UK have moved increasingly into “other” assets over the course of the last decade.

What does the OECD define as “other” assets you ask? Here’s the list: “loans, land, unallocated insurance contracts, hedge funds, private equity funds, other mutual funds, and other investments.”

If that sounds risky to you, or if you have doubts about whether pensioners would knowingly stake their retirements on the performance of alternative assets that probably have no place in a conservative portfolio, just know that you’re not alone. We’ll leave you with the following warning from OECD Secretary General Angel Gurría:

“Pension funds and life insurers are feeling the pressure to chase yield  and to pursue higher-risk investment strategies that could ultimately undermine their solvency. This not only poses financial sector risks but potentially jeopardizes the secure retirement of our citizens.”










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13. Pension Funds Are "Compromising Their Solvency" OECD Warns - http://ift.tt/1aoht8i

Zero Hedge -

Four months ago in “The Global War On Pensioners”, we highlighted the impact perpetually suppressed risk-free rates are having on pension funds. The critical point is this: the lower the investment return assumption (the assumed discount rate), the higher the present value of pension liabilities, meaning funds must either concede that liabilities have ballooned in the low yield environment, or take greater risks to justify elevated investment return assumptions. 

This state of affairs has exacerbated an already bad situation for many public sector pension funds in the US and has helped fuel a shift towards “alternatives” by funds determined to maintain investment return assumptions despite the fact that ZIRP and NIRP are making those assumptions more unrealistic by the day. For a detailed recap, see the following:

For more on the risks posed by the intersection of pension funding gaps and persistently low rates, we go to the OECD’s Business and Finance Outlook (first discussed here in the context of bond market liquidity last week):

The relationship between the liabilities of pension funds and annuity providers and the assets backing those liabilities (i.e. the funding ratio) determines the financial situation of these institutions, including their solvency. Interest rates play a role for both the asset and the liability side of the balance sheet of these institutions and understanding how interest rates affect both is essential to understanding the potential impact of low interest rates.

Low interest rates affect the liabilities of pension funds and annuity providers because the liabilities depend on the discount rate used to calculate the present value of future promises. The discount rate used to calculate the net present value is generally assumed to be the risk-free rate, usually the long-term government bond yield (e.g. the 10-year government bond yield). Other things equal, when government bond yields decline, the estimated value of future liabilities increases.

The impace of a reduction in interest rates on the value of the assets backing the liabilities of these investors depends not only on the proportion of the portfolio invested in fixed income securities, but also on the valuation methods, and the maturity of those securities.. To the extent that interest rates remain low into the future and the fixed income securities in the portfolio reach maturity, reinvestments into new fixed income securities carrying lower yields would reduce the future value of assets, in proportion with the share of the portfolio invested in fixed income securities. As a result of this lower future value of assets, pension funds’ and insurance companies’ assets might not be sufficient to back up their promises, unless the pension orpayment promise is adjusted to the new environment of low interest rates, low inflation, and growth..

The extent to which pension funds and insurance companies engage in a ‘search for yield’ is the main concern for their outlook. Pension funds may shift their portfolio allocation towards investments that could potentially fetch higher returns but in exchange for an increased overall risk profile for their investment portfolio. As pension funds move into riskier investments in search of higher returns to fulfil their pension promises, they may be seriously compromising their solvency situation in the event of a negative shock (e.g. liquidity freeze).

As you can see from the above, pension funds in the US, Canada, and the UK have moved increasingly into “other” assets over the course of the last decade.

What does the OECD define as “other” assets you ask? Here’s the list: “loans, land, unallocated insurance contracts, hedge funds, private equity funds, other mutual funds, and other investments.”

If that sounds risky to you, or if you have doubts about whether pensioners would knowingly stake their retirements on the performance of alternative assets that probably have no place in a conservative portfolio, just know that you’re not alone. We’ll leave you with the following warning from OECD Secretary General Angel Gurría:

“Pension funds and life insurers are feeling the pressure to chase yield  and to pursue higher-risk investment strategies that could ultimately undermine their solvency. This not only poses financial sector risks but potentially jeopardizes the secure retirement of our citizens.”








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As I Promised, the Nordic States' Central Bank QE Program Slides Backwards and Starts To Collapse
By : Zero Hedge Published on : 6/26/2015 3:41:38 PM

Earlier this year I expounded upon the absurdity of the massive NIRP campaign embarked upon by the ECB and the nordic central banks. To recap, reference“Fu$k the Fundamentals!”: Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to SaveandDespite What You Don’t Hear In The Media, It’s ALL OUT (Currency) WAR! Pt. 1- in particular:

Okay, now back to this discussion of currency wars, something’s got to give. Countries cannot (or at least, have never) successfully pursued all three methods of currency manipulation without failing. According to Wikipedia:

TheImpossible trinity(also known as theTrilemma) is atrilemmaininternational economicswhich states that it is impossible to have all three of the following at the same time:

    1. Afixed exchange rate
    2. Freecapitalmovement (absence ofcapital controls)
    3. An independentmonetary policy

It is both a hypothesis based on theuncovered interest rate paritycondition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed.

The Impossible Trinity or “The Trilemma”, in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed.

So, what has the nordic state centrsl bankers and the ECB drawn from these Veritaseum blog lessons? Apparently nothing, as denoted in yesterday’s Bloomberg articleSigns Swedish QE Backfiring as Liquidity Evaporates:

Its probably not what the Riksbank expected.Quantitative easing is supposed to drive down longer-dated yields. But as investorsobsess over market depth, the Riksbanks bond purchases are undermining liquidity and driving Swedish yields higher.

The financial conditions – the currency and the bond yields – are moving in the wrong direction, Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said by phone. The assumption is that the Riksbank wants yields to go down and the krona to weaken, but its been the opposite direction recently. That should pose a problem.

Swedens 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago. And though Swedish yield spreads have narrowed relative to German bonds, investors can still earn about 15 basis points more by holding AAA-rated 10-year notes issued by Sweden than they can holding similar notes from Germany.

Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbanks QE program, Danske said in a note on Tuesday.

Kronas Allure

Meanwhile, the extra yield is adding to the appeal of the krona. Since the Riksbank started its bond-purchase program in mid-February, Swedens currency has appreciated more than 4 percent against the euro. Its up 5 percent against Norways krone and is 3 percent higher versus the dollar.

Nordea Bank AB estimates the krona is trading about 3 percent above the Riksbanks forecast, based on the trade-weighted exchange rate. That will make it harder for the bank to prevent disinflation as import prices decline.

The Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. Thats about 14 percent of the market or 3 percent of Swedens gross domestic product. Any efforts to expand asset purchases would deplete Swedens already limited sovereign debt supply, SEB AB and Danske Bank have said.

And there you have it. This is simply more proof that those who are running the central banking system of these countries truly have absolutely no idea what they are doing. An “I told you so” just wouldn’t be appropriate here, would it?








As I Promised, the Nordic States' Central Bank QE Program Slides Backwards and Starts To Collapse

Earlier this year I expounded upon the absurdity of the massive NIRP campaign embarked upon by the ECB and the nordic central banks. To recap, reference “Fu$k the Fundamentals!”: Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save and Despite What You Don’t Hear In The Media, It’s ALL OUT (Currency) WAR! Pt. 1 - in particular:

Okay, now back to this discussion of currency wars, something’s got to give. Countries cannot (or at least, have never) successfully pursued all three methods of currency manipulation without failing. According to Wikipedia:

The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:

    1. fixed exchange rate
    2. Free capital movement (absence of capital controls)
    3. An independent monetary policy

It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. 

The Impossible Trinity or “The Trilemma”, in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed.

So, what has the nordic state centrsl bankers and the ECB drawn from these Veritaseum blog lessons? Apparently nothing, as denoted in yesterday’s Bloomberg article Signs Swedish QE Backfiring as Liquidity Evaporates:

It’s probably not what the Riksbank expected. Quantitative easing is supposed to drive down longer-dated yields. But as investors obsess over market depth, the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher.

“The financial conditions – the currency and the bond yields – are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said by phone. The assumption is that “the Riksbank wants yields to go down and the krona to weaken, but it’s been the opposite direction recently. That should pose a problem.”

Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago. And though Swedish yield spreads have narrowed relative to German bonds, investors can still earn about 15 basis points more by holding AAA-rated 10-year notes issued by Sweden than they can holding similar notes from Germany.

“Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program,” Danske said in a note on Tuesday.

Krona’s Allure

Meanwhile, the extra yield is adding to the appeal of the krona. Since the Riksbank started its bond-purchase program in mid-February, Sweden’s currency has appreciated more than 4 percent against the euro. It’s up 5 percent against Norway’s krone and is 3 percent higher versus the dollar.

Nordea Bank AB estimates the krona is trading about 3 percent above the Riksbank’s forecast, based on the trade-weighted exchange rate. That will make it harder for the bank to prevent disinflation as import prices decline.

The Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, SEB AB and Danske Bank have said.

And there you have it. This is simply more proof that those who are running the central banking system of these countries truly have absolutely no idea what they are doing. An “I told you so” just wouldn’t be appropriate here, would it?










via Zero Hedge http://ift.tt/1KfSE2N
13. As I Promised, the Nordic States' Central Bank QE Program Slides Backwards and Starts To Collapse - http://ift.tt/1uiR5GI

Zero Hedge -

Earlier this year I expounded upon the absurdity of the massive NIRP campaign embarked upon by the ECB and the nordic central banks. To recap, reference “Fu$k the Fundamentals!”: Negative Rates In EU Will Absolutely Wreck the Very System the ECB Sought to Save and Despite What You Don’t Hear In The Media, It’s ALL OUT (Currency) WAR! Pt. 1 - in particular:

Okay, now back to this discussion of currency wars, something’s got to give. Countries cannot (or at least, have never) successfully pursued all three methods of currency manipulation without failing. According to Wikipedia:

The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:

    1. fixed exchange rate
    2. Free capital movement (absence of capital controls)
    3. An independent monetary policy

It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. 

The Impossible Trinity or “The Trilemma”, in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed.

So, what has the nordic state centrsl bankers and the ECB drawn from these Veritaseum blog lessons? Apparently nothing, as denoted in yesterday’s Bloomberg article Signs Swedish QE Backfiring as Liquidity Evaporates:

It’s probably not what the Riksbank expected. Quantitative easing is supposed to drive down longer-dated yields. But as investors obsess over market depth, the Riksbank’s bond purchases are undermining liquidity and driving Swedish yields higher.

“The financial conditions – the currency and the bond yields – are moving in the wrong direction,” Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said by phone. The assumption is that “the Riksbank wants yields to go down and the krona to weaken, but it’s been the opposite direction recently. That should pose a problem.”

Sweden’s 10-year government-bond yield, which traded as low as 0.2 percent in April, was at 1.1 percent on Tuesday. Its five-year yield was 0.4 percent, after trading below zero just two months ago. And though Swedish yield spreads have narrowed relative to German bonds, investors can still earn about 15 basis points more by holding AAA-rated 10-year notes issued by Sweden than they can holding similar notes from Germany.

“Swedish rates continue to trade strong relative to Germany because of a lack of material in the repo market as a result of the Riksbank’s QE program,” Danske said in a note on Tuesday.

Krona’s Allure

Meanwhile, the extra yield is adding to the appeal of the krona. Since the Riksbank started its bond-purchase program in mid-February, Sweden’s currency has appreciated more than 4 percent against the euro. It’s up 5 percent against Norway’s krone and is 3 percent higher versus the dollar.

Nordea Bank AB estimates the krona is trading about 3 percent above the Riksbank’s forecast, based on the trade-weighted exchange rate. That will make it harder for the bank to prevent disinflation as import prices decline.

The Riksbank targets about $10 billion in government bond purchases as it tries to revive consumer-price growth after months of deflation. That’s about 14 percent of the market or 3 percent of Sweden’s gross domestic product. Any efforts to expand asset purchases would deplete Sweden’s already limited sovereign debt supply, SEB AB and Danske Bank have said.

And there you have it. This is simply more proof that those who are running the central banking system of these countries truly have absolutely no idea what they are doing. An “I told you so” just wouldn’t be appropriate here, would it?








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Confusion Reigns At PBoC As Multi-Trillion Yuan Bailout Threatens To Undermine Rate Cuts
By : Zero Hedge Published on : 6/23/2015 11:32:45 PM

A few months back, we began to ask ourselves what QE in China might look like.

In early March it became apparent that Beijing was caught between accelerating capital outflows and a decelerating, export-driven economy. This presented China with the following rather unpalatable choice: risk exacerbating capital outflows by devaluing to stabilize economic growth or stand firm on the currency front in an effort to stem the outflows and hope the economy doesnt deteriorate further in the meantime.

Policy rate cuts had proven largely ineffective (as they have since) in terms of boosting the economy and so, we predicted that Beijing would ultimately join the rest of the world in the Keynesian twilight zone where ZIRP, NIRP, and perpetual debt monetization run roughshod over common sense.

Sure enough, the market soon began to debate the merits of a massive refi program designed to help Chinas local governments crawl from beneath a debt pile that, thanks to off balance sheet LGFV financing, had grown to 35per of GDP. We suggested that one way or another, the PBoC would end up using the refi effort to implement some manner of backdoor QE.

China set the refi quota at CNY1 trillion initially which meant that the countrys provincial governments would be allowed to swap up to 1 trillion yuan of their LGFV debt for lower-yielding, longer term muni bonds. This was, essentially, a pilot program designed to gauge demand.

As it turns out, banks were not eager to swap higher yielding assets for lower yielding assets and after a few local governments pulled their offerings, the PBoC decided to create demand by doing two things: 1) compelling the banks to participate in the debt swap using the same tactics the party uses to compel banks to do a lot of other things, and 2) allowing the banks to pledge the new bonds for central bank cash which can then be re-lent into the real economy, effectively transforming the entire refi effort into a Chinese version of ECB LTROs. In other words, China went unconventional and was, at that point, just one step away from outright QE.

Heres Morgan Stanley with a summary of the program to date:

Local Government Financing Vehicles (LGFVs) LGFVs came into the spotlight in 2011/12 after Chinas US$20 trillion debt stimulus efforts to kick-start the economy following the global financial crisis. The central government wanted local governments to borrow money, but local governments were not allowed to borrow directly from the financial markets because of the Budget Law. Hence, we witnessed the rise in LGFVs, which serve as a platform for off-balance sheet lending of local governments to pursue mainly infrastructure projects. Details of the LGFV Debt Swap Program In mid-May this year, the MOF announced a RMB 1 trillion debt swap of LGFV loans into local government bonds. Another RMB 1 trillion was added in early June, bringing the total quota to RMB 2 trillion. Chinese banks are required to underwrite the local government bonds, at least for the same amount as the LGFV loans that will be repaid by the swap. The local government bonds would have a tenor of 1-10 years and coupon of 1-1.3x of the treasury yields.

Of course, the entire effort is nothing more than an attempt to kick the can further down the road and indeed, when the PBoC reversed course on the continuation of LGFV financing, it effectively undermined the programs stated goal by allowing local governments to accumulate still more high cost debt just as they began to refinance their legacy loans.

But the program isnt just a bailout for Chinas provinces. It also amounts to a bank bailout because ultaimtely, it wasnt clear how many local governments would have been able to service their loans going forward given the size of their debt load. WSJ has more:

China is bailing out the nations heavily indebted local governments, relying on trusted methods to keep its financial system stable despite promises to allow market forces to play a greater role.

Beijing is permitting provinces to issue at least 2.6 trillion yuan ($419 billion) in bonds in 2015, the first local-government issuances in more than 20 years, to stave off a debt crunch. Local administrations have accumulated some 18 trillion yuan in bank loans and bonds to fund risky land and property dealsequivalent to a third of Chinas economy. As the real-estate market slows, state-owned banks that did much of the lending are on the hook.

The municipal bonds are aimed at allowing local governments to refinance short-term bank loans, which carry high interest rates of 7per. The move won plaudits from economists and investors as a market-based solution to the debt problem.

What is transpiring, however, is more akin to the public bailout of Chinas state-owned banks in the 1990s. Back then, the government pumped billions of dollars in fresh capital into the banks and carved out bad loans from the lenders. Only around a fifth of the soured debt was ever recovered.

Beijing mandated last month that state-owned lenders buy the bonds, effectively swapping them for higher-interest loans. As in the past, the approach seems more like shifting around state resources, analysts said.

Banks will remain the biggest buyers of local government bonds, which means the risk will stay in the system. Its the same accounting treatment that Beijing used in the 1990s, said Terry Gao, a senior analyst at Fitch Ratings.

Beijing allowed governments to negotiate directly with banks to swap maturing loans for bonds. As an enticement, the government is allowing banks, which face a squeeze on income because of the lower interest rates they are getting, to use the bonds as collateral for low-cost loans from the central bank.

The debt swap is effectively a debt restructuring for banks, said Zhu Haibin, J.P. Morgan Chase & Co.s chief China economist.

For reference, heres a look at debt by province, revenue growth by region, and the dramatic effect the program will have on WAM and funding costs:

While there’s probably a degree to which the program does represent a government-assisted bank bailout, it’s not entirely clear that the 200bps+ hit the banks are taking doesn’t negate the refi benefit. In other words, banks reduce credit risk and improve their capital position (lower risk weight for munis than for LGVF loans) but lose interest income that, once the first CNY2 trillion of bonds are swapped, could amount to around 2per of industry earnings. Additionally, to the extent the banks use PBoC cash obtained via LTROs to make loans to individuals and corporations, it’s not entirely clear that overall credit risk will improve either. Meanwhile, the extra supply is serving to undercut the PBoC’s efforts to keep rates low, in yet another example of China’s multiple easing efforts tripping over each other. Here’s Reuters:

Support for China’s economy from the central bank has been put at risk by a surge in municipal bond issuance that has driven up yields, undermining its efforts to cut borrowing costs.

Heavily indebted local governments seeking to refinance expensive debt have issued more than 600 billion yuan ($96.7 billion) of municipal bonds in the past month - more than in all of 2014.

Traders are betting government bond yields will rise rather than fall in coming months on the back of more debt sales, producing a tug-of-war between a People’s Bank of China (PBOC) determined to prop up flagging economic activity and a bond market awash with supply.

“The sudden fall in government bond futures really runs against the overall monetary easing trend,” said a senior trader at a major Chinese bank.

“It reflects market sentiment that investors are supplied with too much new debt of late, including local government bonds.” Five-year September 2015 government bond futures suffered their worst trading day of the year on May 26.

Driving the huge new issuance of municipal bonds is an estimated 22.6 trillion yuan of high interest local government debt, which provinces are struggling to refinance more cheaply.

This also serves to underscore what we said last month: because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.

The takeaway here is that while China is rather proud of the fact that it hasn’t yet implemented outright QE, Beijing has now put in place a bewildering hodge-podge of hastily construed easing measures that can’t seem to get out of their own way. For instance, successive RRR cuts have served to undermine efforts to ramp up ABS issuance (who needs balance sheet relief when the PBoC is slashing RRR?). And now we see excessive muni supply driving up yields even as the PBoC has cut the benchmark lending rate three times since November. Only time will tell whether the PBoC’s efforts will succeed in mitigating China’s economic slowdown, but in interim it’s worth noting that throwing things at the wall until something sticks is usually not a particularly effective strategy.








Confusion Reigns At PBoC As Multi-Trillion Yuan Bailout Threatens To Undermine Rate Cuts

A few months back, we began to ask ourselves what QE in China might look like.

In early March it became apparent that Beijing was caught between accelerating capital outflows and a decelerating, export-driven economy. This presented China with the following rather unpalatable choice: risk exacerbating capital outflows by devaluing to stabilize economic growth or stand firm on the currency front in an effort to stem the outflows and hope the economy doesn’t deteriorate further in the meantime. 

Policy rate cuts had proven largely ineffective (as they have since) in terms of boosting the economy and so, we predicted that Beijing would ultimately join the rest of the world in the Keynesian twilight zone where ZIRP, NIRP, and perpetual debt monetization run roughshod over common sense.

Sure enough, the market soon began to debate the merits of a massive refi program designed to help China’s local governments crawl from beneath a debt pile that, thanks to off balance sheet LGFV financing, had grown to 35% of GDP. We suggested that one way or another, the PBoC would end up using the refi effort to implement some manner of backdoor QE. 

China set the refi quota at CNY1 trillion initially which meant that the country’s provincial governments would be allowed to swap up to 1 trillion yuan of their LGFV debt for lower-yielding, longer term muni bonds. This was, essentially, a pilot program designed to gauge demand.

As it turns out, banks were not eager to swap higher yielding assets for lower yielding assets and after a few local governments pulled their offerings, the PBoC decided to create demand by doing two things: 1) compelling the banks to participate in the debt swap using  the same tactics the party uses to compel banks to do a lot of other things, and 2) allowing the banks to pledge the new bonds for central bank cash which can then be re-lent into the real economy, effectively transforming the entire refi effort into a Chinese version of ECB LTROs. In other words, China went “unconventional” and was, at that point, just one step away from outright QE. 

Here’s Morgan Stanley with a summary of the program to date:

Local Government Financing Vehicles (LGFVs) LGFVs came into the spotlight in 2011/12 after China’s US$20 trillion debt stimulus efforts to kick-start the economy following the global financial crisis. The central government wanted local governments to borrow money, but local governments were not allowed to borrow directly from the financial markets because of the Budget Law. Hence, we witnessed the rise in LGFVs, which serve as a platform for off-balance sheet lending of local governments to pursue mainly infrastructure projects. Details of the LGFV Debt Swap Program In mid-May this year, the MOF announced a RMB 1 trillion debt swap of LGFV loans into local government bonds. Another RMB 1 trillion was added in early June, bringing the total quota to RMB 2 trillion. Chinese banks are required to underwrite the local government bonds, at least for the same amount as the LGFV loans that will be repaid by the swap. The local government bonds would have a tenor of 1-10 years and coupon of 1-1.3x of the treasury yields.

Of course, the entire effort is nothing more than an attempt to kick the can further down the road and indeed, when the PBoC reversed course on the continuation of LGFV financing, it effectively undermined the program’s stated goal by allowing local governments to accumulate still more high cost debt just as they began to refinance their legacy loans.

But the program isn’t just a bailout for China’s provinces. It also amounts to a bank bailout because ultaimtely, it wasn’t clear how many local governments would have been able to service their loans going forward given the size of their debt load. WSJ has more:

China is bailing out the nation’s heavily indebted local governments, relying on trusted methods to keep its financial system stable despite promises to allow market forces to play a greater role.

Beijing is permitting provinces to issue at least 2.6 trillion yuan ($419 billion) in bonds in 2015, the first local-government issuances in more than 20 years, to stave off a debt crunch. Local administrations have accumulated some 18 trillion yuan in bank loans and bonds to fund risky land and property deals—equivalent to a third of China’s economy. As the real-estate market slows, state-owned banks that did much of the lending are on the hook.

The municipal bonds are aimed at allowing local governments to refinance short-term bank loans, which carry high interest rates of 7%. The move won plaudits from economists and investors as a market-based solution to the debt problem.

What is transpiring, however, is more akin to the public bailout of China’s state-owned banks in the 1990s. Back then, the government pumped billions of dollars in fresh capital into the banks and carved out bad loans from the lenders. Only around a fifth of the soured debt was ever recovered.

Beijing mandated last month that state-owned lenders buy the bonds, effectively swapping them for higher-interest loans. As in the past, the approach seems more like shifting around state resources, analysts said.

“Banks will remain the biggest buyers of local government bonds, which means the risk will stay in the system. It’s the same accounting treatment that Beijing used in the 1990s,” said Terry Gao, a senior analyst at Fitch Ratings.

Beijing allowed governments to negotiate directly with banks to swap maturing loans for bonds. As an enticement, the government is allowing banks, which face a squeeze on income because of the lower interest rates they are getting, to use the bonds as collateral for low-cost loans from the central bank.

“The debt swap is effectively a debt restructuring for banks,” said Zhu Haibin, J.P. Morgan Chase & Co.’s chief China economist.

For reference, here’s a look at debt by province, revenue growth by region, and the dramatic effect the program will have on WAM and funding costs:

While there’s probably a degree to which the program does represent a government-assisted bank bailout, it’s not entirely clear that the 200bps+ hit the banks are taking doesn’t negate the refi benefit. In other words, banks reduce credit risk and improve their capital position (lower risk weight for munis than for LGVF loans) but lose interest income that, once the first CNY2 trillion of bonds are swapped, could amount to around 2% of industry earnings. Additionally, to the extent the banks use PBoC cash obtained via LTROs to make loans to individuals and corporations, it’s not entirely clear that overall credit risk will improve either. Meanwhile, the extra supply is serving to undercut the PBoC’s efforts to keep rates low, in yet another example of China’s multiple easing efforts tripping over each other. Here’s Reuters:

Support for China’s economy from the central bank has been put at risk by a surge in municipal bond issuance that has driven up yields, undermining its efforts to cut borrowing costs.

Heavily indebted local governments seeking to refinance expensive debt have issued more than 600 billion yuan ($96.7 billion) of municipal bonds in the past month - more than in all of 2014.

Traders are betting government bond yields will rise rather than fall in coming months on the back of more debt sales, producing a tug-of-war between a People’s Bank of China (PBOC) determined to prop up flagging economic activity and a bond market awash with supply.

“The sudden fall in government bond futures really runs against the overall monetary easing trend,” said a senior trader at a major Chinese bank.

“It reflects market sentiment that investors are supplied with too much new debt of late, including local government bonds.” Five-year September 2015 government bond futures suffered their worst trading day of the year on May 26.

Driving the huge new issuance of municipal bonds is an estimated 22.6 trillion yuan of high interest local government debt, which provinces are struggling to refinance more cheaply.

This also serves to underscore what we said last month: because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply. 

The takeaway here is that while China is rather proud of the fact that it hasn’t yet implemented outright QE, Beijing has now put in place a bewildering hodge-podge of hastily construed easing measures that can’t seem to get out of their own way. For instance, successive RRR cuts have served to undermine efforts to ramp up ABS issuance (who needs balance sheet relief when the PBoC is slashing RRR?). And now we see excessive muni supply driving up yields even as the PBoC has cut the benchmark lending rate three times since November. Only time will tell whether the PBoC’s efforts will succeed in mitigating China’s economic slowdown, but in interim it’s worth noting that throwing things at the wall until something sticks is usually not a particularly effective strategy.










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Cities, States Shun Moody's For Blowing The Whistle On Pension Liabilities
By : Zero Hedge Published on : 6/20/2015 1:30:00 AM

A little over a month ago, Moodys downgraded the city of Chicago to junk, triggering over $2 billion in accelerated payment rights for creditors and complicating an effort by Mayor Rahm Emanuel to refinance some $900 million in floating rate debt and borrow another $200 million to pay off the related swaps.

The decision by Moodys came on the heels of an Illinois Supreme Court decision that struck down a pension reform bid. Although not binding on other states, that verdict effectively set a precedent as it relates to implicit contracts between employers and employees, meaning state and local officials across the country will need to find creative ways to fill budget gaps.

When it comes to underfunded pension liabilities one major concern is that in a world characterized by ZIRP and NIRP, its not entirely clear that public pension funds are using realistic investment return assumptions. As you can see from the table below, the assumed rates of return for Chicagos pension funds are nowhere near the risk-free rate, meaning one of two things must be true: 1) fund managers are taking greater risks to hit the targets, or 2) the targets wont be hit. If the latter is true, then the present value of the funds liabilities is likely much larger than reported.

After 2008, Moodys stopped relying on the investment return assumptions of cities and states opting instead to use its own models. Unsurprisingly, this led the ratings agency to adopt a much less favorable view of state and local government finances and as WSJ reports, rather than admit that their return assumptions are indeed unrealistic, local governments have opted to drop Moodys instead. Heres more:

More than a year before Moodys Investors Service downgraded Chicagos bonds to junk status, one of its senior analysts asked top city officials to explain why the third-largest U.S. city was healthier than a troubled island commonwealth flirting with insolvency, according to people familiar with the conversation.

Help me understand why Chicago is different than Puerto Rico? said the Moodys analyst, Rachel Cortez, during a February 2014 meeting that Mayor Rahm Emanuel attended, two of these people said. A spokesman for Moodys and Ms. Cortez said the firm doesnt discuss private meetings with issuers or other capital-market participants.


The exchange inside City Hall came to embody a more aggressive stance by the worlds second-largest ratings firm as Moodys cut Chicagos credit rating by seven notches over a two-year period. City officials were taken aback by the Puerto Rico comment and then angered by Moodys final move to junk in May 2015, a stance that differed from more optimistic conclusions made by other ratings firms. Since last summer, the city has left the Moodys Corp. unit off four bond deals..

Tim Blake, a Moodys managing director who heads its public pension task force, said the firm is rationally applying its ratings models. Our job is to make judgments on credit risk as we see it, said Mr. Blake, noting some issuers with improved pension situations have been upgraded.

Other cities and counties from California to Florida are reconsidering their relationship with Moodys as it expands its stricter ratings approach around the U.S., threatening a seal of approval that for decades was all but a necessity in the municipal-bond world..

Moodys metamorphosis began after the 2008 crisis as ratings firms drew criticism in Congress and from regulators for their rosy grades on mortgage bonds that went sour. For local governments, the key change came in 2013 when Moodys decided it would no longer rely on cities and states targets for investment returns when it calculates pension liabilitiesone of the biggest costs shouldered by local governments.Moodys own estimates are more conservative, meaning holes in pension funds look bigger.

As Moodys adopted the stricter ratings methodology, it diverged from rivals Standard & Poors Ratings Services and Fitch Ratings in its assessment of problems facing local governments across the U.S. From 2002 to 2007, Moodys and S&P upgraded issuers at about the same rate. But from 2008 to 2014, S&P had seven upgrades for every one of Moodys, according to a recent Nuveen Asset Management LLC report.

Santa Clara County, Calif., omitted Moodys from its past two deals because of the firms disagreement over how some property-tax revenues were to be distributed. We became convinced that Moodys was not being responsible and so therefore we moved away from them, said Jeff Smith, who oversees the operations of the county, which includes San Jose. We dont think it has had, or will have, any effect on our ability to sell bonds.


The latest government to back away from Moodys is Miami-Dade County, which last week decided to hire Kroll Bond Rating Agency Inc. instead of Moodys for its $534 million sale of airport bonds. Krolls rating is two notches higher than Moodys.


We wanted a fresh set of eyes, said Anne Lee, chief financial officer of the Miami-Dade aviation department, of the decision to not hire Moodys, which she adds charges 30per to 40per more than other rivals.

Yes, a “fresh set of eyes,” and preferably a set that will not take a realistic look at pension fund return assumptions.

Perhaps the most unnerving thing about the above is that state and local governments across the country are already facing huge pension funding gaps using their own unrealistically high return assumptions.

If they were to adopt Moody’s standards, they would likely find that the holes are orders of magnitude larger and rather than face reality, officials have apparently opted to go with the Wall Street approach to dealing with people who try to spoil the fun: namely, when someone blows the whistle, you simply fire them.

Pray for the pensioners.








Cities, States Shun Moody's For Blowing The Whistle On Pension Liabilities

A little over a month ago, Moody’s downgraded the city of Chicago to junk, triggering over $2 billion in accelerated payment rights for creditors and complicating an effort by Mayor Rahm Emanuel to refinance some $900 million in floating rate debt and borrow another $200 million to pay off the related swaps. 

The decision by Moody’s came on the heels of an Illinois Supreme Court decision that struck down a pension reform bid. Although not binding on other states, that verdict effectively set a precedent as it relates to ‘implicit contracts’ between employers and employees, meaning state and local officials across the country will need to find creative ways to fill budget gaps.

When it comes to underfunded pension liabilities one major concern is that in a world characterized by ZIRP and NIRP, it’s not entirely clear that public pension funds are using realistic investment return assumptions. As you can see from the table below, the assumed rates of return for Chicago’s pension funds are nowhere near the risk-free rate, meaning one of two things must be true: 1) fund managers are taking greater risks to hit the targets, or 2) the targets won’t be hit. If the latter is true, then the present value of the funds’ liabilities is likely much larger than reported.

After 2008, Moody’s stopped relying on the investment return assumptions of cities and states opting instead to use its own models. Unsurprisingly, this led the ratings agency to adopt a much less favorable view of state and local government finances and as WSJ reports, rather than admit that their return assumptions are indeed unrealistic, local governments have opted to drop Moody’s instead. Here’s more:

More than a year before Moody’s Investors Service downgraded Chicago’s bonds to junk status, one of its senior analysts asked top city officials to explain why the third-largest U.S. city was healthier than a troubled island commonwealth flirting with insolvency, according to people familiar with the conversation.

“Help me understand why Chicago is different than Puerto Rico?” said the Moody’s analyst, Rachel Cortez, during a February 2014 meeting that Mayor Rahm Emanuel attended, two of these people said. A spokesman for Moody’s and Ms. Cortez said the firm doesn’t discuss “private meetings with issuers or other capital-market participants.”


The exchange inside City Hall came to embody a more aggressive stance by the world’s second-largest ratings firm as Moody’s cut Chicago’s credit rating by seven notches over a two-year period. City officials were taken aback by the Puerto Rico comment and then angered by Moody’s final move to junk in May 2015, a stance that differed from more optimistic conclusions made by other ratings firms. Since last summer, the city has left the Moody’s Corp. unit off four bond deals..

Tim Blake, a Moody’s managing director who heads its public pension task force, said the firm is “rationally applying” its ratings models. “Our job is to make judgments on credit risk as we see it,” said Mr. Blake, noting some issuers with improved pension situations have been upgraded.

Other cities and counties from California to Florida are reconsidering their relationship with Moody’s as it expands its stricter ratings approach around the U.S., threatening a seal of approval that for decades was all but a necessity in the municipal-bond world..

Moody’s metamorphosis began after the 2008 crisis as ratings firms drew criticism in Congress and from regulators for their rosy grades on mortgage bonds that went sour. For local governments, the key change came in 2013 when Moody’s decided it would no longer rely on cities’ and states’ targets for investment returns when it calculates pension liabilities—one of the biggest costs shouldered by local governments. Moody’s own estimates are more conservative, meaning holes in pension funds look bigger.

As Moody’s adopted the stricter ratings methodology, it diverged from rivals Standard & Poor’s Ratings Services and Fitch Ratings in its assessment of problems facing local governments across the U.S. From 2002 to 2007, Moody’s and S&P upgraded issuers at about the same rate. But from 2008 to 2014, S&P had seven upgrades for every one of Moody’s, according to a recent Nuveen Asset Management LLC report.

Santa Clara County, Calif., omitted Moody’s from its past two deals because of the firm’s disagreement over how some property-tax revenues were to be distributed. “We became convinced that Moody’s was not being responsible and so therefore we moved away from them,” said Jeff Smith, who oversees the operations of the county, which includes San Jose. “We don’t think it has had, or will have, any effect on our ability to sell bonds.”


The latest government to back away from Moody’s is Miami-Dade County, which last week decided to hire Kroll Bond Rating Agency Inc. instead of Moody’s for its $534 million sale of airport bonds. Kroll’s rating is two notches higher than Moody’s.


“We wanted a fresh set of eyes,” said Anne Lee, chief financial officer of the Miami-Dade aviation department, of the decision to not hire Moody’s, which she adds charges “30% to 40%” more than other rivals.

Yes, a “fresh set of eyes,” and preferably a set that will not take a realistic look at pension fund return assumptions. 

Perhaps the most unnerving thing about the above is that state and local governments across the country are already facing huge pension funding gaps using their own unrealistically high return assumptions.

If they were to adopt Moody’s standards, they would likely find that the holes are orders of magnitude larger and rather than face reality, officials have apparently opted to go with the Wall Street approach to dealing with people who try to spoil the fun: namely, when someone blows the whistle, you simply fire them. 

Pray for the pensioners.










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