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Thursday, July 26, 2007

The Economist and Demography

Well for some time now I have been waging a kind of single-handed battle with the Economist to try and get them to change their emphasis when it comes to the weighting they give to demographic factors in economic processes. All of this reached a high point a couple of weeks back when I put up a piece on A Fistful of Euros, complaining about a couple of rather sloppy details of journalism more than anything else really, but the background to the issue was a demographic one. Well the accusation seemed to have stung home, since it warranted a reply from their central European correspondent.

Well, give some people an inch and they grap a mile, and Claus and I just couldn't resist the opportunity to go over a nail a whole shopping list of complaints on their back door.

Now maybe it is just pure coincidence, but guess what? The Economist has a cover photo, a leader article on population decline, and a special study about the impact of ageing on Japan. And guess what else? The emphasis has changed. Ever so subtly, but it has. Here (below) is just one extract, and with which I personally would hardly disagree at all. But the best advice I have for you is to get on over there, and have a good read of both pieces.

If the world's population does not look like rising or shrinking to unmanageable levels, surely governments can watch its progress with equanimity? Not quite. Adjusting to decline poses problems, which three areas of the world—central and eastern Europe, from Germany to Russia; the northern Mediterranean; and parts of East Asia, including Japan and South Korea—are already facing.

Think of twentysomethings as a single workforce, the best educated there is. In Japan (see article), that workforce will shrink by a fifth in the next decade—a considerable loss of knowledge and skills. At the other end of the age spectrum, state pensions systems face difficulties now, when there are four people of working age to each retired person. By 2030, Japan and Italy will have only two per retiree; by 2050, the ratio will be three to two. An ageing, shrinking population poses problems in other, surprising ways. The Russian army has had to tighten up conscription because there are not enough young men around. In Japan, rural areas have borne the brunt of population decline, which is so bad that one village wants to give up and turn itself into an industrial-waste dump.

Change like this is more than welcome, whatever the actual reasons which lie behind it. None of this is easy, since this is really the first time that something like this has happened in systematic fashion, so all of us are really only feeling our way.

So to my friends on the Economist, if any of you are reading this. Well done. A start is a start, even if, as Jimmy Cliff would remind us, we all still have "a hard road to travel" on this one.

Forint Under Pressure

It's very difficult to say what is going on out there in the financial markets at the moment, all we can say is that there is some very choppy water following the unsettling effect of the US sub prime mortgages debacle.

Bloomberg has a piece on the Hungarian Forint:

The Hungarian forint tumbled to the lowest in more than five weeks as declines in global stocks and concern about U.S. subprime-mortgage losses prompted investors to sell emerging-market assets.

The forint was the third worst-performer of 26 emerging- market currencies tracked by Bloomberg, falling with the Polish zloty and the Slovak koruna. The NTX Index of stocks in 30 of the region's companies fell 2.1 percent.

``The currencies in the region are falling due to a sell-off in equities and worries about the subprime loans,'' said Lucy Bethell, currency strategist at Royal Bank of Scotland in London. ``We may not see a rapid recovery but rather some further pressure in the nearest days.''

The forint fell as low as 251.19 against the euro, its lowest level since June 18, and traded at 250.96 by 5:42 p.m. in Budapest.

Now it is important here to remain calm here, since today we have choppy water, and tomorrow the seas may be all serene again, but just in case they aren't we need to watch very carefully what exactly is happening. Hungary is quite an important indicator, since it is obviously rather vulnerable to any swift change in sentiment.

So is Argentina:

Argentine President Nestor Kirchner blamed investment funds for sowing doubt about official inflation data and speculating on the country's benchmark peso bond as its yield soared to the highest ever. The yield on Argentina's 5.83 percent inflation-linked bond due in December 2033 rose about 55 basis points, or 0.55 percentage point, to 7.5 percent, according to Banco Mariva in Buenos Aires. It earlier reached 7.64 percent, the highest since the bond was issued in November 2005. The bond's price, which moves inversely to the yield, fell to 122.25 pesos from 131 pesos yesterday..... Argentina's central bank today helped coordinate the sale by state-owned banks of about $150 million in the currency market, according to a spokesman at the bank who declined to be named, citing bank policy.

Now the interesting point here is that market participants have known about the case of Alejandro Barrios at the Indec statistical agency for weeks now, but the big reaction has only come this week. Now why?

The Dow Jones fell significantly today, people in the US are definitely very nervous about what is going on in the property market.

The Financial Times ran this today:

Financing for the Chrysler and Alliance Boots buy-outs – two of the biggest private equity deals in the global markets – ran into serious difficulties on Wednesday, intensifying fears about the possibility of a credit crunch.

and this:

The gloom in the credit markets intensified on Wednesday as Chrysler postponed a $12bn loan deal and banks failed to sell £5bn ($10.2bn) of senior loans to fund the leveraged buy-out of Alliance Boots.

Bankers raising $20bn for the private equity buy-out of Chrysler Group from DaimleyChrysler were forced to postpone the sale of $12bn in loans for the car group.

Bankers still intend to raise a further $6bn in loans for Chrysler’s finance arm, albeit with higher interest rates but an additional $2bn loan for the financial company was cancelled last week......

Almost 30 bond or loan deals have been pulled since late June, according to Barings Asset Management, and until the market for corporate bonds shows signs of stabilising, the pipeline of deals threatens to give credit markets a serious case of heartburn.

The rapid withdrawal of liquidity has had a significant effect on market sentiment but it remains unclear whether it marks the start of a downturn in the corporate credit cycle. At this juncture, corporate defaults are at record lows and economic fundamentals remain sound.

Given that backdrop, some credit investors are starting to ask: when do we pile back in? “The market is starting to look attractive,”says Michael Kastner, portfolio manager at SterlingStamos, but he adds that “there is no rush to get involved at the moment”.

As the pipeline continues to bulge, Mr Kastner said: “It’s tough to step in and catch that falling knife.”

and this:

Private equity firms can now be in no doubt that they are going to have to pay more to fund the debt for buy-out deals they have already sealed.

This week alone has seen two of the biggest deals on either side of the Atlantic – buy-outs of Alliance Boots and Chrysler – forced to increase the premium, or interest rates, on loans they are trying to sell. Bankers in a flurry other deals have had to act likewise.

n the US, investors have been avoiding buying riskier structures such as covenant-lite loans and so-called Pik-toggle loans and bonds – which allow companies to make interest payments in the form of new debt.

Among deals to face difficulties were Thomson Learning, which was forced to restructure the terms of bonds and loans for its leveraged buy-out, and US Foodservice’s $5.3bn bond and loan offering, which was initially downsized and later pulled.

Eric Tutterow, analyst at Fitch Ratings, said investors were now growing concerned that large bridge loans to companies whose deals are being restructured or cancelled could result in tightening credit conditions. For the six deals that have been cancelled since the beginning of June, analysts estimate that a total of nearly $13bn of debt could be held by the underwriters for the foreseeable future.

Too many of these so-called hung deals will quickly cut banks’ appetites for underwriting debt for new buy-outs. JPMorgan, Goldman Sachs, Citigroup, Bear Stearns and Morgan Stanley are on the hook for $22bn between them in Chrysler debt alone if they cannot shift it.

and there is this derivates loss news from Italy:

The Bank of Italy estimates Banca Italease SpA, the country's biggest leasing company, will lose 500 million euros ($686 million) on derivatives contracts opened with clients, according to the Milan-based company.

The company will present ``definitive figures on the losses on derivatives positions'' when it discloses first-half earnings, Italease said today in a stock exchange statement.

and from the IHT:

Italease used so-called mirror contracts to hedge its derivatives positions. For every derivative contract Italease sold to its clients, it took out an opposite position with investment banks, effectively preventing the lender from profiting or losing money on swings in interest rates. This strategy eliminated its market risk, but left the company exposed to the counterparty, or default, risk of its customers.

and then there is this in Bloomberg:

Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets.

The Standard & Poor's 500 Index fell to its lowest in almost three months. The U.K.'s FTSE 100 slid 3.2 percent, the biggest drop since the current market rally started in March 2003. Benchmark stock indexes in Argentina, Brazil, Mexico, Turkey and Sweden dropped more than 3 percent.

``We're seeing a global repricing of risk as the cost of capital ratchets up,'' said Joseph Quinlan, chief market strategist at Bank of America's investment strategy group in New York. Bank of America's investment-management unit oversees about $566 billion. ``We're working our way through a period of angst and anxiety.''

and emerging market bonds generally are taking a beating:

Emerging-market bonds slid, pushing yields over U.S. Treasuries to the widest since September, as investors reduced holdings of riskier securities.

Developing nation debt has declined for five days as growing losses in so-called collateralized debt obligations backed by subprime mortgages triggers risk aversion. Argentine and Venezuelan bonds, among the riskiest in emerging markets, led losses.

``The declines are spilling out from the global story centered on CDOs and the subprime market,'' said Michael Atkin, head of sovereign research in Boston at Putnam Investments. ``It's not a story that has originated in emerging markets. We're trading in lock-step with the move in risky assets.''

The spread, or extra yield, on emerging-market bonds over U.S. Treasuries widened 21 basis points to 2.15 percentage points at 1:16 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index.

Well this has been a long post if you have gotten this far. What does it all mean? Vey hard to say at this point. What we need to remember is that these kind of things can become self-fulfilling prophecies, if people believe credit is going to tighten, then it will tighten. But equally, a week from now it could all be over. Hard to say really. Volatility is certainly way up, so we could be building up for something, but then again we might not be. Just watch and wait time I think. But DO keep watching.