Money-market indicators that traditionally warned of stresses in the financial system are being muffled by a deluge of central bank cash as the euro- region crisis focuses on Greece’s future in the currency bloc and the meltdown of Spanish lenders.
The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 51.8 basis points below the euro interbank offered rate at 12:12 p.m. in London, from minus 50.3 basis points on June 15. The swap stayed in a range of 41.5 to 59.1 basis points below the benchmark in the past three months, even as an index of bank- bond risk surged 52 percent.
Concern that Greece’s election result would hasten the country’s exit from the euro and the deepening banking woes in Spain failed to clog up the plumbing of Europe’s financial markets. That’s because since December, banks that can’t access money markets have been able to get as much cash as they need through the European Central Bank’s 1 trillion-euro ($1.3 trillion) longer-term refinancing operations.
“The political worries haven’t been translated into spreads and the main reason for that is the ECB’s LTRO,” said Brian Jack, head of liquidity funds at Ignis Investment Services Ltd. in Glasgow. “There’s a shrinking pool of top-tier banks money-market funds are willing to invest in, and thanks to the central banks those now have abundant liquidity.”
Lehman Bankruptcy
The euro-dollar basis swap for three months was 157.5 basis points less than Euribor on Nov. 29, before the ECB pumped the new cash into the system. That was the most expensive cost since October 2008, in the depths of the global banking catastrophe that followed Lehman Brothers Holdings Inc.’s bankruptcy.
The one-year basis swap was 53.3 basis points below Euribor from minus 52.5 at the end of last week, according to data compiled by Bloomberg. The cost of that cross-currency exchange has also plummeted since December, when it reached 106.5 basis points less than Euribor, the most expensive in three years.
A gauge of the expected cost of interbank borrowing in euros in three months’ time fell 43 percent since January. The FRA/OIS spread, which measures prices in the forward market for three-month Euribor relative to overnight indexed swaps, was 32 basis points, from 32.5 last week and 54.5 on Jan. 10.
Interbank Freeze
The ECB offered banks three-year loans for as much as they asked for, helping stave off a looming freeze in the interbank market, and teamed up with the U.S. Federal Reserve to ensure European lenders had access to dollars. The LTRO and dollar swap lines removed the threat of banks’ funding drying up and a financial-system failure.
“Central banks are very, very concerned about what may happen,” said Don Smith, a London-based economist at ICAP Plc, the biggest interdealer broker. “They will open the floodgates and flood the markets with liquidity. It will be very difficult to get a handle on risk in the money markets.”
The increasing stresses that have been absent in most money-market measures are evident elsewhere in credit.
The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers rose to 279 basis points at the end of last week, from 183 on March 19, according to data compiled by Bloomberg. The gauge snapped three days of declines to climb 2.5 basis points today.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals 1,000 euros annually on a contract protecting 10 million euros of debt.
Stocks Performance
The MSCI All-Country World Index (MXWD) of stocks dropped 7 percent since the beginning of May, tumbling to $305.6 last week. The index today climbed to $306.61, Bloomberg data show.
The Euribor/OIS spread increased to a three-month high of 43.6 basis points, from 40.9 on June 15. It’s the first time the measure has broken out of its range of 37 basis points to 42 basis points since the end of March.
Another place where stress has been visible is the repurchase agreement -- or repo -- market, in which a bank or investor borrows money while putting up government bonds as collateral. Banks’ preference for the shortest-term repos secured against top-rated securities has made it more expensive to borrow overnight than for three months.
The rate for a one-day euro repo rose to 17.2 basis points last week, the highest since March 12, compared with 11 basis points on three-month contracts, according to the EBF. The so- called inverted curve signals strain in bank funding.
Deposit Flight
Part of the reason for the tension in repo markets may be deposit withdrawal from banks in the euro area’s periphery, according to Sandy Chen, an analyst at Cenkos Securities Plc in London. Greek banks have lost more than 30 percent of their total deposits since the end of 2009 as companies withdrew about 45 percent of their money, Bloomberg data show.
In Spain, total deposits have slipped 7 percent since peaking 12 months ago, while companies have reduced their deposits by 15 percent.
“Banks hit by withdrawals are often forced to sell the liquid assets they would’ve pledged as collateral for repo funding,” said Chen. That process is magnified as balance sheets shrink and rating downgrades force more sales, which in turn reduces the impact of monetary easing by central banks, he said.
‘Fully Participate’
“It’s questionable whether the Greek and Spanish banks would be able to fully participate” in another LTRO, “because a portion of their liquid assets would have been sold off to meet those deposit withdrawals,” said Chen. “In the private repo markets, ratings downgrades would mechanistically drive a further shrinkage.”
Central banks are continuing to pump money into the financial system to prevent them seizing up as Europe’s woes worsen and U.S. economic growth slows.
Fed swap lines to foreign central banks surged to as high as $109 billion on Feb. 15 from $2.4 billion on Nov. 30, after the U.S. central bank and five counterparts joined forces to lower borrowing costs. The Fed lends dollars through the swaps to other central banks, which auction them to local lenders and give the Fed foreign currency as collateral.
The Bank of England announced June 14 it will activate a sterling liquidity facility to aid banks and plans to start a credit-easing operation that may boost lending in the economy by 80 billion pounds ($125 billion).
Interbank Loans
The rates banks say they pay for short-term loans from their peers are also falling in defiance of the deepening euro- region crisis. Three-month dollar Libor has remained little changed since the end of March and was at 0.468 percent today. That’s the same rate it has been all month and compares with 0.583 percent on Jan. 5.
Three-month Euribor dropped to 0.659 percent from 1.418 percent on Dec. 19, while Euribor USD, a gauge of dollar funding costs compiled by the Brussels-based European Banking Federation, fell to 0.949 percent, from 0.989 percent April 11.
The 10 biggest U.S. money-market funds cut their holdings of debt issued by euro-area banks by $8.3 billion in May, Bloomberg data show. Holdings of debt from European banks, including those outside the euro area, have fallen every month since the end of January for a total decline of $20 billion to $178 billion.
Parliament Majority
Greece’s two largest pro-bailout parties won enough seats to forge a parliamentary majority, official projections showed. The result eased concern the country is headed toward an imminent exit from the euro, while paving the way for weeks of horse trading with providers of its rescue cash and coalition talks between politicians.
New Democracy and Pasok won a combined 162 seats in the 300-member parliament, according to Interior Ministry projections with 99 percent of yesterday’s vote counted.
Spain caused concern this month after it requested as much as 100 billion euros from the European Union to recapitalize its banks. The nation’s debt burden prompted Moody’s Investors Service to cut its credit rating by three steps to the cusp of junk status.
“Markets are just so scared by the vulnerabilities of the system, with very weak growth, low inflation and high debt,” said ICAP’s Smith. “When debt’s so high you’re very vulnerable to confidence and that’s draining away.”
To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net
Money-Market Signals Muffled by Central Bank Cash in Euro Crisis
Simon Dawson/Bloomberg
The ECB offered banks three-year loans for as much as they asked for, helping stave off a looming freeze in the interbank market, and teamed up with the U.S. Federal Reserve to ensure European lenders had access to dollars.
The ECB offered banks three-year loans for as much as they asked for, helping stave off a looming freeze in the interbank market, and teamed up with the U.S. Federal Reserve to ensure European lenders had access to dollars. Photographer: Simon Dawson/Bloomberg
MONEY MARKETS-Spanish bond shortage distorts repo - Reuters
* Spanish bond shortage distorts repo market
* Italian rates rise but market still functioning
* Interbank cash rates fall on rate cut expectations
By Kirsten Donovan
LONDON, June 18 (Reuters) - A lack of available Spanish government bonds, due to so many being used to obtain funding at the European Central Bank, is distorting pricing in repo markets and causing investors headaches as they seek to cover hefty short positions.
As international investors sold Spanish government bonds this year, domestic banks bought them and parked them at the ECB in return for funds - particularly during the two recent three-year funding operations.
As a result, investors who need the bonds because of their own short positions must pay a premium for the paper.
When this happens in repo markets - where banks commonly use government bonds as collateral to raise funding - bonds are said to be trading "special".
Effectively, the investor who needs the bonds pays a premium to their counterparty in the trade - the opposite of a typical repo trade where the party borrowing cash pays the premium.
"There's some good evidence of a collateral shortage out there," said ICAP rate strategist Chris Clark. "Quite a lot may be being used at the ECB and the market short (positions) out there will be increasing the demand for specific bonds."
It is the opposite of what might be expected when a country's debt comes under pressure. Then counterparties are usually more reluctant to be left holding the bonds.
"The collateral just isn't there. That's one of the problems and the few bonds that are still available are highly sought after by people who want to cover their short positions," said Commerzbank rate strategist Benjamin Schroeder.
Ten-year Spanish government bond yields have risen more than 130 basis points since the start of May, while two-year yields are up over 2 percentage points.
That prompted international clearing house LCH.Clearnet SA to increase the cost of using Spanish bonds to raise funds via its repo service last month. Analysts said their trading desks had since seen volumes over the platform drop.
"It's a further segregation of European money markets, where banks are retreating from central clearing houses and going back to domestic clearing or bilateral agreements," Schroeder said.
As the euro zone debt crisis intensified this month, mainly due to worries about Spain's banking sector, Italian general collateral (GC) repo rates, paid to borrow funds against a basket of government bonds, have been pushed higher.
There is little trade in the Spanish general collateral market but banks are still able to borrow using Italian bonds as collateral, despite Italy being seen as vulnerable to contagion from worries about Spain.
Three-month Italian GC rates rose to 0.42 percent at the end of last week, compared to the Eonia overnight rate at around 30 basis points, according to ICAP. The Italian rate had traded below Eonia from the time of the ECB's second three-year funding operation at the end of February until the end of May.
"There's been a rise in Italian general collateral rates, both outright and relative to the Eonia OIS curve," ICAP's Clark said. "Despite a reduction in the amount of term activity that goes on, the Italian market is still very much functional."
RATE SPECULATION
Three-month Euribor interbank lending rates eased again, hitting their lowest since the second quarter of 2010 as speculation grew the ECB may cut interest rates.
ECB president Mario Draghi heightened expectations the bank could cut interest rates or take further policy action soon after saying on Friday that the euro zone economy faced serious risks and no inflation threat.
September and December Euribor futures contracts rallied to contract highs, pushing implied rates lower.
Markets are pricing in a 50 percent chance of a 12.5 basis point cut in the ECB's 0.25 percent deposit rate this year, and a 25 percent of the rate being cut to zero, according to RBS.
Yammer acquisition would boost Microsoft's social-business tools - Seattle Times
At first, social networking was a novelty, a fun thing you did for your social life.
Then businesses came on board, seeing how everything from Facebook-like interactivity to Twitter-y updates could help get their messages out.
Now, social networking has become so much the norm that businesses are trying to figure out how best to use it within their own companies and networks to drive results.
Indeed, social networking for businesses is seen as a next big thing.
"It's going to be something like email that's going to be ubiquitous and that people are going to expect to use in combination with a lot of different applications," said Rob Helm, an analyst with the independent research firm Directions on Microsoft.
Look no further than Yammer, a San Francisco-based company that offers social-networking and content-collaboration tools for businesses. It's one of several such companies, including Jive and Socialtext.
Microsoft is reportedly in talks to acquire Yammer for $1.2 billion, according to several media accounts.
Microsoft declined to comment and Yammer did as well.
Though seen as a next big thing, Microsoft "has missed the market" in terms of providing easy-to-use Facebook-like features as part of its business-collaboration offerings, said Kevin Conroy, president of Blue Rooster, a Seattle-based tech and consulting firm that specializes in building collaborative social-business websites for corporations.
Collaborative tool
Microsoft has SharePoint, its collaboration solution for business that includes some features of social networking, such as the ability to do status updates.
But "they're stand-alone features," Conroy said. "The features don't talk to each other. ... You can do status updates but it doesn't tell your community the updates. The status and the community do not communicate with each other."
And SharePoint can be cumbersome, several analysts said.
That's the void that companies such as Jive, Yammer, NewsGator (which provides an add-on to SharePoint) and Conroy's own Blue Rooster fill. Blue Rooster has an offering called Sepulveda that's built on the SharePoint platform.
A Yammer acquisition by Microsoft — if true — would be a good defensive move against companies such as Jive, Conroy said, adding that "this may get Microsoft back in the game."
What Microsoft would do with Yammer, of course, would be the next question.
Analyst Michael Cherry, with Directions on Microsoft, thinks the software giant may continue to leave Yammer fairly independent, much as it has done with Skype, its last major acquisition.
"It's a good consumer play," Cherry said, as well as a good defensive move to prevent other companies from acquiring Yammer's technologies.
He points to Yammer's user interface, which is remarkably similar to Facebook's, from the blue band on top of the page, to the list of a user's groups and apps on the side, to the news feed down the middle.
Potential position
Microsoft could target Yammer to small organizations such as PTAs or soccer clubs, small businesses or anyone who has small group projects that come and go, he said.
Meanwhile, Cherry added, Microsoft could also position Yammer as "the gateway drug to SharePoint" or keep SharePoint mainly for large business customers.
Analyst Helm says while Microsoft would likely keep the Yammer service alive for consumers, it would probably also work to integrate Yammer's social-networking capabilities into its own products.
The key, he thinks, if acquisition rumors are true, will be seeing if Microsoft "gives Yammer people enough running room to accomplish something in the social-networking realm."
Janet I. Tu: 206-464-2272 or jtu@seattletimes.com.
Morning business round-up: Greek vote hits EU banks - BBC News
What made the business news in Asia and Europe this morning? Here's our daily business round-up:
Continue reading the main storyEuropean banking stocks have fallen sharply despite the victory of pro-bailout parties in Greece's elections on Sunday.
While the victory of the pro-bailout New Democracy party raised hopes that the country would remain in the euro, analysts said much uncertainty remained.
The yield on Spanish bonds - the eurozone country said to be most at risk of needing an international bailout in the future - also remained volatile. The yield on Spain's 10-year bonds had initially fallen as low as 6.767%, before then rising to 7.061%.
In corporate news, staff at car company Ford are staging a 24-hour strike in a dispute over pay and pensions.
Sites at Dagenham in Essex, Bridgend in south Wales, Halewood on Merseyside and Southampton will be affected.
The Unite union said staff were "furious" at plans to shut the final salary pension scheme to new starters and lower their pay rates from 2013.
A Ford spokesman said "the vast majority of the company's employees are not involved in this disagreement".
Majestic Wine has reported a 14% rise in annual profits as it continues to enjoy increasing sales.
Its pre-tax profit for the year to 2 April totalled £23.2m, up from £20.3m a year earlier.
Like-for-like sales, which pull out the impact of new store openings, rose 2.6%. Its total revenues increased by 9% to £280.3m.
Majestic said that sales of fine wine - bottles worth more than £20 - rose 18.5% and now represent 6.2% of UK store sales.
Business headlines
In Asia-Pacific, the world's third-biggest retailer, Tesco, has announced that it is to exit the Japanese marketplace.
The UK supermarket group is to leave Japan in a two-stage process that will first see it sell 50% of its Tesco Japan subsidiary to the country's second-largest retail group, Aeon.
Tesco will then invest £40m in the joint venture before its eventual exit from the business. So far, no deadline for when this will happen has been made public.
Property prices in China fell further in May, indicating that government policies put in place to curb speculation are having the desired effect.
Prices of new homes fell in 55 of 70 Chinese cities from a year earlier.
Beijing has been trying to curb property speculation amid fears that asset bubbles may be forming.
However, there are concerns that if prices fall too much too soon, it may hurt China's overall economic growth.
Australia's Fairfax Media will shed 1,900 jobs over three years and give two high-profile broadsheets a new "compact" format, it has announced.
Websites of the two newspapers, The Age and The Sydney Morning Herald, will also introduce pay walls from 2013.
Two printing facilities in Sydney and Melbourne are also to be closed by 2014 as part of the cost-cutting measures.
Fairfax said it was taking "decisive actions to fundamentally change the way we do business".
And in our Business Daily podcast, we talk to past and present advisers to Germany's government about the prospects of Chancellor Angela Merkel offering concessions to Greece, following the high support for anti-austerity parties in Greek elections at the weekend.
Tough luck, Generation X: Only half of wealthy Baby Boomers to leave money for their kids...and ONE IN THIRD would rather give it to charity - Daily Mail
- Baby Boomers defined as people between the ages of 47 and 66
- Generation X refers to people born between early 1960s and early 1980s
- 55 per cent of Baby Boomers believe it's important to leave money to offspring
- Most Baby Boomers believe each generation should earn its own wealth
- Three-quarters of people younger than 46 favor leaving money to kids
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When members of the Baby Boomers generation die in the next 50 years, they will leave trillions of dollars in wealth behind, but their children should not hold their breath for a large inheritance.
According to the U.S. Trust Insights on Wealth and Worth annual study released on Monday, only 55 per cent of Baby Boomers - those between the ages of 47 to 66 - think it is important to leave money for their offspring.
U.S. Trust commissioned an independent, national survey of 642 high net worth adults, who were not clients, with at least $3million in investable assets.
Givers: A study found that 31 per cent of wealthy Baby Boomers would prefer to leave their money to charity
One of three Baby Boomers surveyed – about 31 per cent - don’t think it is important to leave a financial inheritance and said they would rather leave money to charity than to their children.
By contrast, three-quarters of wealthy people under age 46 said it's a priority to leave inheritance for their children.
The top reason for not wanting to leave money for their kids is the belief shared by some Baby Boomers that each subsequent generation should work to earn its own wealth.
Following closely behind is the thought that it is more important to invest in children’s success while they are growing up.
‘Our survey points to a shift in generational behavior and outlook, most likely shaped by personal experience and societal responses to economic realities,’ said Keith Banks, president of U.S. Trust.
Banks added that well-off parents are concerned that the next generation is not prepared to inherit wealth, which is not surprising considering the fact that most of the Baby Boomers surveyed don't talk to their kids about money: just 37 per cent said they've fully disclosed their net worth to their children.
Kept in the dark: Just 37 per cent of Baby Boomers said they've fully disclosed their net worth to their kids
Those over age 67 said they weren't having this discussion because they were raised to avoid money talk, while younger respondents said they didn't want to inhibit their kids' work ethic.
Unlike the majority of people from her generation, 63-year-old Kathleen Taylor, of Chimacum, Washington, taught her two grown children since they were young to be responsible for their own money.
That is why she plans to leave most of her money to her children and some money to charitable causes, ABC News reported.
One way Taylor and her husband taught their children about responsible spending was providing the value of college tuition, room and board to each of them and putting them in charge of paying the bills.
‘People thought we were crazy,’ she told ABC.
The Taylors plan to start a college fund once their children start having their own kids. And they intend to add to it on their grandchildren’s birthdays as long as Taylor and her husband are alive.
Mrs Taylor said she hopes her own children will do the same for their great-grandchildren.
The U.S. Trust study also has found that 42 per cent of Baby Boomers and 54 per cent of those under age 46 are paying medical costs for their parents or other relatives.
More money means more pain for fans - FOXSports.com
LONDON, England
If money is the root of all evil, then somebody forgot to tell supporters of Manchester City and Chelsea - both of whom get to spend the summer floating in a happy daze.
Before the arrival of their sugar daddies, backed by petrodollars from Abu Dhabi and Russia respectively, City were light years away from winning the Premier League title and Chelsea were hardly earmarked as contenders for the Champions League. Now, they are trophy-holders and serious contenders for next season.
Cash is not always king in football but it sure helps. For all the teams without billionaire benefactors, the mission to keep up with the spiraling salaries and trumped-up transfer fees is a challenge that is as overwhelming as it is risky. Some 60 per cent of Premier League clubs reported a loss when the last financial accounts were released.
Competing with the likes of City and Chelsea in the money league is an impossible task, so the rest have to be resourceful, and hope that the new regulations designed to try to encourage clubs to run themselves as a sustainable business (a pan-European initiative called Financial Fair Play) actually begin to shackle the spending power of the super rich. Not everyone, it must be said, is holding their breath on that one even if it is a nice idea.
And now there is suddenly even more money sloshing around for every Premier League club to get their hands on. A new, record-breaking television deal, worth a record $4.7 billion over three years — up a whopping 71 per cent on the previous arrangement — will soon be boosting the coffers everywhere. This is just a deal for domestic television rights, so when internet and overseas deals are factored in, the Premier League’s broadcasting worth is estimated at closer to a stunning $8 billion.
Each club is guaranteed at least $22 million more each year than they previously received. To put that into perspective, that means the last-placed finisher in 2013 will probably get more than Manchester City earned for finishing top of the Premier League pile last season. That sum, incidentally, totaled $95 million.
The Premier League’s chief executive, Richard Scudamore, believes the deal is very significant in comparison to major overseas clubs such as Real Madrid, Barcelona, AC Milan, Bayern Munich and so on.
"It allows people to plan and gives us a degree of financial security. I don't underestimate that,” he said. “The idea you can plan with some certainty your revenues for the next four years is a big thing."
And in fact, there is an interesting comparison with Spain’s La Liga, in which the heavyweighs from Barcelona and Madrid negotiate their own television rights individually. They can pull in around $200 million per season, but the smallest clubs earn a fraction – in the region of $20 million. The Premier League have a system where the deal is struck collectively. All boats are raised in England under this new deal – and suddenly, a leap to the Premier League means so much more to the teams in the Championship, a rung below.
It is questionable how great all this will turn out to be for fans, however. Somebody has to pay for these mega-deals, and part of the cost will presumably be passed on to the consumers in the form of price hikes for subscription channels that deliver football coverage. Live games have been the preserve of the pay-per-view channels in England for 20 years now. In that time, the cost of attending a match inside the stadium has ballooned, too.
But the increase is fabulous news, obviously, for clubs, players and the wheeler-dealer agents who squeeze every drop of earnings out that they can. It is likely that the $300,000 a week salary that Carlos Tevez takes home will soon be dwarfed. And with some big stars — Emmanuel Adebayor, Luka Modric and Robin van Persie come to mind — seeking improved deals, there are fewer reasons for clubs to stretch their payrolls.
As yet , there has not been an obvious knock-on effect in terms of the Premier League’s transfer activity. Only Chelsea have been notably lavish in advance of the European Championship, with the Belgian playmaker Eden Hazard arriving and Porto’s Hulk very strongly linked with a big money move. A greater indication of whether this gives clubs more clout in the market will come when the Euros finish.
Bruce Buck, Chelsea’s chairman, predicted Abramovich is eager to up the ante to help his team to build on the Champions League win. “We’ve seen him, year after year, invest and put his hand in his pocket and spend big money. He may go to another level now,” said Buck.
Chelsea, which starts next season's Premier League campaign at Wigan, are desperate for a stronger challenge in the league. City will kick off its title defense at home to Southampton but are eager to make more of a go of it in the Champions League.
Manchester United are intent on bouncing back, but have a tough start to the season against Everton - the team that wrecked United's title dream. Arsenal, who host Sunderland on the opening day, have to try to stay in the top four. Liverpool, who face Tottenham, Arsenal and Manchester City, in three of their first four fixtures, are under pressure to improve.
Now there is even more money to make the football world go round.
Business leaders cry for "action" at G20 meeting - The Guardian
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