STORIES (MACRO AND MICRO) THAT MAY AFFECT OUR ECONOMY – WE ALL NEED TO BE AWARE OF GLOBAL EVENTS
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Financial markets delivered a clear thumbs-down verdict Friday morning on the Group of 20’s attempt to soothe worries about Europe, triggering speculation the world’s top economic policy makers will take more aggressive steps this weekend to contain an increasingly malignant euro-zone debt crisis.
“They’ve got to stop the self-fulfilling spiral between sovereign risk and bank risk. They need to break that feedback loop,” said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh.
Fears that Europe’s long-running debt crisis could spark a global financial catastrophe, potentially on par with the collapse of Lehman Brothers threee years ago, have mounted, contributing to a massive global equity rout that sent shares skidding around the world on Thursday.
Concerns that European banks’ exposure to debt issued by Greece, Italy and other troubled sovereigns could lead to a bank failure have made for increasing tensions in money markets.
The spread between three-month euribor and overnight interest rate swaps, a key measure of stress in the European banking system, hit a new high for the year at 89 basis points on Friday, analysts said, but it remains well below the 195-point peak scored in 2008. A basis point is one one-hundredth of a percentage point.
French banks are seen at the center of the crisis. Data from the Basel, Switzerland-based Bank for International Settlements, which serves as a clearing house for the world’s central banks, showed that French banks have the most exposure to Greek and Italian debt.
French banking shares in particular have been hammered lower in recent months as the European bank sector has suffered. Shares of BNP Paribas SA /quotes/zigman/132276 FR:BNP -3.28% , France’s largest bank, are down more than 51% over the last three months, while shares of Societe Generale SA /quotes/zigman/167380 FR:GLE -3.56% have plunged 57%.
A menu of unconfirmed rumors about potential moves by the euro zone and the European Central Bank were credited with lifting U.S. stocks Friday and allowing European indexes to erase losses scored earlier in the session. Those losses coincided with investor disappointment with a G-20 statement that promised support for Europe but was short on concrete details.
Group of 20 ministers are gathered in Washington for weekend meetings of the International Monetary Fund and the World Bank.
Options, options
Among options favored by economists, a move to bolster the firepower of the European Financial Stability Facility, or EFSF, would go a long way toward convincing markets that European officials are ready to ring-fence the region’s banks and other sovereigns from the fallout that would be potentially created if Greece were to default on its obligations, analysts say.
Late Thursday, Olli Rehn, the European Union’s monetary affairs commissioner, told reporters in Washington that some form of leverage for the 440 billion euro ($595 billion) EFSF is seen as an option.
Group of 20 calms Europe’s markets
The euro-zone crisis continues with little more than rumors emerging about reforms. Still, European markets pare early losses Friday with a growing relief that this isn’t going to be the moment when Greece collapses — but the worry remains that a Greek default could come in the future along with lingering concern over Italy and Spain.
U.S. officials, including Treasury Secretary Timothy Geithner, have urged European officials to use leverage. Such a move would boost the firepower of the fund, which euro-zone leaders agreed to revamp to provide more support for governments and banks in a July 21 summit.
That would help address worries that the fund remains too small to effectively prevent a domino effect that would hit other sovereigns and regional banks in the event of a default, economists said.
A revamped and leveraged EFSF would likely be the primary vehicle to provide capital injections for banks, economists said. But it might not be enough to put markets fully at ease.
“There are, of course, numerous practical, legal and conceptual problems,” said Beat Siegenthaler, currency strategist at UBS.
In a research note, Siegenthaler pointed out that the EFSF’s “set up to loan to countries who would then intervene in their banks bilaterally, while many would argue multilateral intervention with centralized decision making would make more sense.”
The EFSF, Siegenthaler wrote, would likely be used primarily to protect banks, leaving little money left over to protect other vulnerable sovereigns, which would mean it may fall to the European Central Bank to continue in its controversial role of purchasing distressed government bonds.
Clock’s ticking down
Meanwhile, questions remain over just how quickly Europe could implement further changes to the EFSF. The July 21 revamp must be approved by all 17 euro-zone governments.
“It may be optimistic to assume that politicians have the leeway to act fast on the development of the EFSF even if they have the will to do so,” said Jane Foley, senior currency strategist at Rabobank.
Opposition politicians in Estonia are calling for changes in the budget law as a prerequisite for approval, while Slovakia’s prime minister has withheld support for legislation until all countries agree to budget conditions, she noted. And the fall of Slovenia’s government after a confidence motion this week puts its timetable for passage of EFSF legislation in doubt.
In fact, economists said it’s not clear most European leaders see an urgent need to take extraordinary action just yet.
The European Commission on Friday shot down a report that it’s pushing for the accelerated recapitalization of 16 mid-tier banks that nearly failed last summer’s stress tests, noting that banks have moved since 2008 to raise funds and insisting it has the mechanisms in place to provide capital injections if needed.
Rehn earlier this week acknowledged that European banks need more capital but said he disagreed with the IMF’s assessment that the debt crisis could cut the value of European Union bank assets by as much as €300 billion. The IMF has called for a speedy recapitalization of European banks.
“This only adds to our fears that European policy makers will fail to do enough to prevent a new credit crunch in the region,” wrote Ben May, European economist at Capital Economics, in a research note.
Economists say fears of a credit crunch were underlined after a Financial Times report Thursday that BNP Paribas was set to pursue additional funding of around €2 billion euros in the Middle East in an effort to shore up confidence.
“If you ever needed confirmation that we are in the middle of a second banking crisis, it has to be the news that BNP Paribas is reportedly talking to Middle Eastern investors about raising capital, taking us right back to the mad scramble for funds from Asian investors that unfolded in 2008,” said Michael Symonds, credit analyst at Daiwa Capital Markets in London.
In a statement, BNP Paribas said it conducts annual roadshows in an effort to encourage investment and repeated that it sees itself on track to meet Basel III funding requirements by January 2013 without having to raise additional capital. Meanwhile, high-profile warnings over the state of Europe’s banks, particularly in France, came from a variety of sources.
Mohammed El-Erian, chief executive of bond fund giant Pimco, warned in an op-ed in the Financial Times published Thursday that French banks could tip Europe back into recession.
Private institutions around the world have sharply reduced short-term lending to French banks, while a plunge in bank shares since August has left bank equity trading at a 50% discount to tangible book value on average, he wrote.
At the same time, El-Erian noted that the ratio of market capital to total assets for the sector has fallen to 1% to 1.5% — far short of the range of 6% to 8% typically seen for healthier banks.
“These are all signs of an institutional run on French banks,” he wrote. “If it persists, the banks would have no choice but to de-lever their balance sheets in a very drastic and disorderly fashion.”
William L. Watts is a reporter for MarketWatch in Frankfurt.
Quigley Report: A Venture Capital Revival is Upon Us
Venture capital was one of the best asset classes in the world before the dot-com bubble burst. Over the next 10 years, returns plummeted as a result of too much capital in the sector and a lack of public market liquidity.
Then, just as the start-up world was recovering from the tech bubble of the last decade and the negative effects of the ill-considered Sarbanes Oxley legislation, the 2008 financial erupted.
So today, the venture capital community finds itself at a cross roads. While the asset class has been largely abandoned by institutional investors, this disinterest will paradoxically lead to superior returns in the future.
Consider…….
1. Venture capital is no longer be considered a “necessary asset class” to invest in by many limited partners given the sectors insignificant size relative to the financial assets LPs have under management
2. Limited partners, who generally look retrospectively to determine their portfolio allocations, not progressively, have shunned the asset class.
3. But, as a result of this shaking out of the venture capital sector (in terms of #’s of firms and amount of capital raised by those firms) conditions are now actually favorable for sustained long term returns
Taking a data-driven prospective, this presentation argues that the conditions today in the private and public capital markets bode well for superior performance to return to the venture capital asset class this decade. Specifically, the rewards accruing to private investors in the leading tech companies of today far exceed what private investors used to earn from their investment in the best companies of previous tech cycles. Several things have changed in the past 5 years or so that have led to this change. This presentation explores what those changes have been.
COMPETENCIES OF THE 2011 AND BEYOND LEADER
The greatest mandate for leadership in 2011 and beyond is the ability to cut through the information quagmire and make clear decisions. Employees will increasingly require unequivocal direction and nurturing.
Decision-making, given the risks at stake in this high velocity global economy, has become more difficult. Leaders will require increased levels of risk resourcefulness in order to move their company forward through the bombardment of information from the wired world.
Our 2011 and beyond leaders will require keen problem solving and decision making skills; provide vision and clear direction; do more with less; engender a supportive organizational culture built on mutual TRUST. They will require the breadth and depth of experience that provides the necessary capacity to win in the 2011 and beyond world.
They will need to challenge hidden rules and assumptions of their industry and business they also will need to make faster and smarter strategy, execution and pricing decisions and lead the business model innovation.
THE ROLE OF “CONTRACT MANAGEMENT ~ 2011 AND BEYOND
In most cases, CONTRACT EXECUTIVES will be used increasingly not just because of the breadth of their specialist skill sets but because they are more affordable than a fully employed individual(s) with the same or similar competencies (a company does not pay for benefits such as life insurance, dental care, drug plan, etc.). In other situations, CONTRACT EXECUTIVES will bring “outside the paradigm” perspectives, new insights and strategies re: where a company needs to direct its focus and energy in order to compete wisely and profitably; THUS the CONTRACT EXECUTIVE will be the “change agent”. We will see an increasing number of external CONTRACT EXECUTIVES being used as ‘independent’ facilitators to move companies, their management and staff, to adapt their business models (both internally and externally at a macro and/or micro levels) so as to excel in the 2011 and beyond business environment. When re-evaluating goals and strategies, history will need to take a secondary position. The rear view mirror increasingly gives perspective distortion resulting in badly skews planning for the future. New planning horizons will be shorter and more prismatic. CONTRACT EXECUTIVES will be used to cut through the clutter and determine the real and achievable paths that lead to the achievement of a successful organization, as measured against the most significant metrics.