Global Banking

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The BIS’ Layered Globalization Glee

2017 June 24 by

The Bank for International Settlements hailed globalization’s “profoundly positive” results the past half-century in its annual report, due to the “deeply symbiotic” connection between trade and financial openness. It acknowledged inequality and instability with the process, which can be better governed and managed as an economic development strategy both domestically and globally. The proliferation of foreign assets and liabilities and currency hedging, often through banks following cross-border customers, can be divided into three increasingly complex layers moving from simple commodities sale and associated credit to direct transactions for balance sheet purposes. Around half of trade is invoiced in dollars and one-quarter in euros, and basic letters of credit are used in one-sixth of deals. As the global value chain and FDI have deepened in recent decades, more specialized products like derivatives have spread, and in the final phase since the 1980s purely financial engineering supercharged integration so that emerging market international exposure almost doubled to 180 percent of GDP. Developing economies represent half of the worldwide manufacturing chain, with China alone taking one-fifth. As with multinational companies in commerce, global banking groups dominate finance with vast country and regional networks unable to be reflected accurately in nation-based reporting and statistics. Emerging markets’ inward investment contains both debt and equity flows, with the latter implying long-term commitment and the former short-run intra-firm borrowing and speculation. Their exposure has jumped toward offshore money centers as treasuries became more sophisticated and allocations did not involve plan and equipment outlays.

Since the financial crisis a decade ago globalization has been “in check” due in part to lingering trade weakness, but conventional measures of assets and liabilities to output overstate the correction as developing market openness has continued “unabated,” the report insists. Pullback has centered on cross-border bank loans, particularly from Europe, as portfolio fixed-income and stock volume increased. “Deglobalization” is debunked by careful definitions of the prevailing data, which shows lenders in forty jurisdictions reporting a 20 percent drop in cross-border claims from 2007-13 on a balance of payment basis, which can double count and ignore local lines of the consolidated unit. Scrubbing the numbers by bank nationality, Europe’s retreat is  pervasive but can be attributed largely to cyclical deleveraging needed to meet stricter BIS capital and liquidity rules. Financial linkages also transfer technology and boost inclusion by allowing low-income borrowers access to new channels, but can favor capital over traditional labor returns to create wealth disparities. In historical experience cross-border credit flows have been pro-cyclical to amplify booms and busts, and the dollar has soared in risk aversion periods as well to harm emerging market accounts. Since the 2008 crash global monetary policy has also been ultra-sensitive to US Federal Reserve moves, and in addition to building foreign reserves macro-prudential tools have been a crucial defense, and joint regulatory approaches have been forged between geographic and functional financial system blocks. Currency swap mechanisms and tax harmonization can go further, especially with long-run interest rate correlation so tight in recent years. In a sampling of 35 countries, 25 had close spillovers from Fed rate and quantitative easing decisions, and simultaneous shocks could add another layer to the future one-world story.

 

Bank Capital’s Stealth Stressful Stretch

2017 April 28 by

The IMF’s Spring Meeting Global Financial Stability Report departed from previous warnings and hailed emerging market “resilience” with higher growth and commodity prices, and lower credit expansion and corporate leverage,  but pinpointed bank capital strains in China and elsewhere despite the positive general shift. It also challenged current optimism about the “benign” rate normalization path in advanced economies, especially in the US, which could stoke asset class risks and volatility and capital outflows concentrated in local bond markets with large foreign investment and frontier destinations with thin reserve and policy buffers. Protectionism either by default or design would hit export revenues and balance sheets and lenders to that sector. Fund flow herd behavior has traditionally come from retail participants, but institutions have pared exposure in recent quarters and big multi-strategy pools unwinding positions can have outsize effects. Last year one firm divested almost 15 percent of a single country’s sovereign bonds in a reallocation, according to the study. Rising costs will add $135 billion in nonfinancial debt, and BRIC borrowers could be most vulnerable. Manufacturing exports as a share of GDP are steep across the universe range including Mexico, Malaysia and Thailand and equity markets have underperformed relative to benchmarks with cross-border trade barrier threats and rethinking of bilateral and multilateral agreements. With reversal metal and oil prices could likewise sink again after recovery the past year and layer another 1 percent onto the company borrowing total. A 300 bank sample shows “comfortable” Tier I capital, with the amount outside China up 20 percent since 2014, but asset quality doubts persist Brazil,. India and Russia have increased bad loans and reduced profits and 40 percent of the cross-section has poor loss coverage. Around $120 billion in further provisions is needed, equal to 5 percent of capital and cutting the Tier I ratio below 10 percent for one-third of the banks, while stronger systems like Colombia and Indonesia would be spared. Foreign exchange risk is another element regulators should closely monitor, and they should offer hedging tools if commercial alternatives are not readily available, the Fund suggests. China is a more urgent case where many mid-tier institutions overly rely on wholesale lines and have asset-liability mismatches, and recent state bank repo operations to inject liquidity may offer only temporary calm.

China’s massive infrastructure programs are feeling the pinch and the World Bank estimates that spending must double over the coming decades to accommodate the 9.5 billion world population in 2050. The respective shares of multilateral development agencies and private partners, at $75 billion and $150 billion, already trail the annual $1.5 trillion required, and OECD member mutual, pension and insurance funds, with $70 trillion under control should join the effort in light of lagging returns in other categories. The current developing economy pipeline is estimated at $1 trillion, focused on Asia, Europe and Latin America., and portfolio allocation should be boosted by an infrastructure bond index under creation at fund researcher Morningstar. The Bank has an array of dedicated project and policy facilities and has linked with the G-20’s global platform created when Australia was chair in a strategy to double guarantees by end-decade. The IFC has a private co-lending arrangement and the new IDA $2.5 billion low-income window has blended and currency pools for better scaling up to the crushing task, according to executives in charge of internal rebuilding.

 

Financial Cooperation’s Benefit Benediction

2017 April 3 by

Global trade associations and think tanks, wary of Trump Administration “America First” stances leaving currency and trade policies in limbo at its inaugural G-20 meeting, have prepared position papers outlining the merits of regulatory and crisis cooperation through international financial bodies the past decade. The Institute for International Finance released an update on Basel III banking and broader Financial Stability Board capital and liquidity standard harmonization praising the exercise even as it criticized delays and overreach. Risk weighting formulas for the biggest worldwide institutions are in a final phase and may shun internal calculations allowed under previous regimes. The Peterson Institute for International Economics in a separate document warned that President’s executive order rolling back the Dodd-Frank law would undercut the common norm drive since 2008, at the same time that his budget would slash development bank funding. Treasury Secretary Mnuchin had an initial cordial conversation with IMF Managing Director Lagarde, and the analysis notes that previous Republican President Bush bashed the organization before embracing it on Turkey and other rescues, but the current team may maintain distance and insist on historic revamp. The FSB’s work plan is unfinished and the US will soon name a new representative. Pending legislation in Congress would bar Federal Reserve participation in such rule setters as February’s executive decree orders a review of commitments to the Basel Core Principles which could relax current and future regulation. It seeks a “level playing field,” but foreign counterparts including the UK and European central banks fear it could unravel agreements to date and trigger a prudential “race to the bottom.” As to the global financial safety net bilateral and regional swap lines cannot approach the IMF’s $1 trillion in available resources, topped up with American support also for quota and governance reform agreed in 2009 but only completed in 2015. The US 16.5 percent voting share still offers a veto but near-term refusal to contribute or membership withdrawal could jeopardize 30 percent of permanent firepower and accelerate big developing country moves toward alternative structures. Under the 2015 bill authorizing voting changes the Congress already required closing of the exceptional access window for outsize bailouts such as in Greece, which was judged to affect Eurozone health more generally.

The World Bank’s IDA facility was replenished in 2016 with a $4 billion US pledge over the next three years, in addition to $1.5 billion in other unfulfilled development bank obligations. President Kim recently traveled to Africa and previewed $60 billion in medium-term conflict state assistance focused on refugee and fragile populations. Treasury appropriations were reduced several hundred million dollars and the State Department and AID economic accounts were slated for 30 percent adjustments, despite a letter from hundreds of former high-ranking officials emphasizing aid and diplomacy’s importance. Republicans in Congress who opposed the previous administration’s governance and funding decisions have insisted that approaches are long overdue for overhaul and have weighed in on Greece’s 7-year emergency program by discouraging more IMF outlays. European parliamentarians have also turned on their negotiators as another big repayment comes due in June, with Athens balking at further austerity as critics decry its enduring exceptional claims.

The Basel Committee’s Bruising Balance Sheet Shaft

2016 September 22 by

Banking industry associations representing and working in emerging economies have intensified criticism of Basel Committee credit, trading and operating risk proposals as detrimental with their limited supplemental capital market reliance. The Institute for International Finance in a September paper singled out the standard approach replacing internal ratings system as overly rigid in its unintended “downstream impact “on trade finance, corporate borrowing and hedging, and infrastructure, although it also contains pro-active provisions on house loans and other areas which are beneficial. Export credit is estimated at $10 trillion annually and is low-risk as a collateralized, self-liquidating product, but the regulators’ so-called conversion factor drawn from external agency ratings may raise counterparty  percent weightings by triple-digits, according to an International Chamber of Commerce study. Companies depend on banks rather than bond markets, which are thin and illiquid even for big countries like Brazil, Turkey, Mexico and India where the turnover ratio is barely 0.1 percent. Foreign lenders have been steadily retrenching the past decade, with their share of total banking assets down to 15 percent from 25 percent at the peak. Borrowers outside Latin America “typically” lack external credit ratings and are thus subject to 100 percent set aside under the draft Basel formula, which also applies for the first time to subsidiaries of large consolidated groups with holdings over EUR 50 billion. Unhedged foreign currency facilities carry a further 50 percent charge without proof of revenue streams in that unit. Emerging market derivatives are more costly under the model since they are uncollateralized and require additional information technology outlays that may be prohibitive. Infrastructure as an asset class falls under the Specialized Lending category with “adverse treatment” that fails to account for individual transaction features and historically low default rates.  Often official credit agencies offer guarantees and other risk mitigation and financing structures have ample equity and senior debt safety cushions, the IIF argues.

On sovereign bonds the G-20 has been debating separately a framework for GDP-linked instruments, which would allow developing economies to deleverage with public debt levels at their highest since the 1980s amid volatile and declining growth. The central banks of Argentina and Canada presented a joint review for the Hangzhou China summit, and Germany as next year’s host agreed to keep the idea on the agenda. The authors note as in Argentina’s case that “warrants” tied to output thresholds have been a sweetener in commercial restructurings, but a full-fledged risk-sharing bond has yet to be issued to reduce solvency crisis odds. Countries worry that the yield premium demanded will be too steep and not change overall sustainability, while traditional investors like pension funds face difficulty pricing the equity-like component and placing allocation within the existing spectrum. They may also insist on greater returns due to novelty and illiquidity despite the innovation’s potential value to global financial system functioning, as with recent legal breakthroughs on collective action clauses. Government national account measurement and reporting is another concern prominent in Argentina’s episode, and accuracy and frequency challenges may be referred to the IMF under an indicative term sheet under preparation at the Bank of England with public and private sector consultation. It should be simpler than warrant guidelines and have international and domestic law versions for balance sheet flexibility.

Digital Finance’s Tentative Thumbs Up

2016 August 11 by

The Brookings Institute published the second annual edition of its digital and financial inclusion report surveying two dozen low and middle-income economies, with strides toward the 2030 Sustainable Development Goals despite large gender, technology and regulatory gaps. It describes formal banking provision, but finds that almost one-fifth of savers in underserved populations use informal clubs. The US is outside the scope, but 8 percent of households lack accounts and consumer protection is still evolving toward payday lenders and similar nonbank channels. The Treasury Department and Agency for International Development have teamed on “empowerment initiatives” particularly targeting marginalized communities along the Texas-Mexico border and in Appalachia. Africa is well represented in the top ten performers, with Kenya number one at an overall 85 score and South Africa, Uganda, Rwanda and Nigeria in the group. Latin America’s contingent is almost equal from Colombia, Brazil, Chile and Mexico, while the Philippines rounds out the pack and Turkey and India are just behind at over 70 results. Egypt was at the bottom with the only total below 50, ranking in back of Afghanistan, Ethiopia and Haiti as measured by country commitment, mobile capacity, regulatory climate and adoption. A new addition, El Salvador, was singled out for progress, while Peru was praised among existing members for designing a national inclusion strategy, which will be the responsibility of recently-inaugurated President and former investment banker known as PPK to implement. During the campaign income inequality and social safety nets were major issues, and the incoming administration will promote rural and indigenous citizen financial service access as a priority, officials insist. Next-door Colombia sets specific benchmarks for adult product penetration (75 percent) and active accounts (55percent). Mexico collects both demand and supply-side data and stresses education and an access point for every 10,000 savers in its approach. African countries lead in mobile money application but lag in capacity pending greater “buildout,” according to the study.

 Interoperable digital payment platforms are an overriding supervisory challenge for central banks and service providers, with the Philippines’ GCash and PayMaya a good recent example of innovation and oversight coordination. India followed in 2015 with an agreement in principle among a dozen users for a common network to be established under Reserve bank rules. However a sizable gender disparity lingers in the developing world with women nine points behind men on formal financial system engagement. The Brookings project urged more information collection, detailed targets, country models such as Zambia’s female enterprise credit push, and biometric features to facilitate digital preference while safeguarding privacy. It added that post offices should be core to outreach as World Bank and Gallup surveys have found them to be popular and comfortable transaction locations. Migrants and refugees are also “under-resourced” and three countries in the ranking, Turkey, Pakistan and Ethiopia are among the top refugee hosts globally. Youth need to be served and branchless banking is natural given constant movement from influx to accommodation and resettlement. Language is another barrier, and technology for verifying identity in food and allowance allocation could be adapted for microfinance and small business credit, and relief organizations are already working with development partners on these more inclusive schemes, the document concludes.

Financial Inclusion’s Anguished Acceptance Angles

2016 July 15 by

Mainstream global banks through the IIF and microfinance provider Accion International released a survey of two dozen emerging market experiences with financial inclusion, which highlighted traditional bank importance as a channel while relating commercial and policy obstacles hampering progress. The definition goes beyond simple account-holding to encompass a full credit and insurance product range and associated education and training. Unbanked and under-banked customers in low and middle-income economies are a $400 billion market, according to management consultant Accenture and of the $700 million new accounts opened in this category from 2011-14, 90 percent were in brick and mortar intermediaries with the remainder mobile-phone innovators. The bottom income category with deposits rose from 40 percent to 55 percent of the total over the period, but less than 5 percent were in mobile money, and the focus of the IIF-Accion survey is thus on retail commercial banks. Among well-known names with a long history are Turkey’s Isbank, South Africa’s Standard Bank, and Pakistan’s Habib Bank, and they combine business development with social responsibility mandates and target rural and remote households, informal entrepreneurs and women without credit scores. Kenyan and East European banks have insurance company partnerships, and ATM and e-money technology evolution are priorities. They try to compete with platforms like Peru’s BiM that can be accessed with cheap smart phones, the report points out.

Digital payments for government, business and personal purposes are used for processing and cross-selling, often through payroll advances to companies. However connectivity can be compromised by lagging infrastructure and power supply, and a big deterrent is the lack of trust in the automated chain. Banks have put agents in place to assure clients and ensure quality control, but turnover is a problem and the cultural preference for cash is strong throughout the developing world. Commercial banks can have dedicated microfinance divisions such as HSBC in India and Santander in Brazil, which has over 350,000 borrowers with an average loan of $800. Rural credit unions in China sponsor these schemes, and fintech firms have also entered the space upon launch. Data collection and analysis through proprietary programs are advancing rapidly, with Commercial Bank of Africa an example of an algorithmic approach for immediate approval of one-month facilities. Credit bureaus contribute to this information, but their output is often inadequate or missing for a real-time customer profile. Even with aggressive recruitment “dormancy” is an issue with 40 percent of South Asian adults not tapping their account for a year or more, or running it down to zero balance. According to a Global Financial Literacy study, only one-third of clients have proper understanding of savings alternatives, and banks have started their own public service efforts in addition to simplifying offerings. Reaching break-even level and profitability are long struggles, and even when the latter is accomplished it only lasts for 3-5 years until margin and scale squeezes. Policymakers can aid growth through less onerous identity and criminal reporting requirements, removal of interest rate restrictions, better data sharing protocols and improve regulator capacity. The Basel Committee could also ease capital rules for this limited high-risk activity, and regular official dialogue should also be private sector-inclusive, the report recommends.

 

The OECD’s Small Firm Finance Finagling

2015 April 30 by

The joint industrial and emerging economy OECD issued a gloomy report on post-crisis small enterprise finance through banks and urged broader securities-related availability through asset-backed instruments and exchange IPOs. The Paris-based agency argued that regulatory reform since 2008 has cramped business credit and that official emergency programs left borrowers with increased debt and leverage. Real interest rates have spiked for the sector and start-up companies have been especially shut out. Non-banks and private investors can help plug the gap, and leasing and factoring already popular in Europe can be extended to the developing world. Corporate bonds have been tried by less than 5 percent of firms surveyed with their earnings and size requirements and low ratings entailing steep yields. Mid-cap companies could benefit from a private placement market for sophisticated buyers with easier reporting and related work to modernize secondary trading and insolvency frameworks.

Loan securitization and covered bonds offer potential but the former has been denigrated with the US mortgage security collapse and the latter must still be carried on-balance sheet as an “encumbrance,” according to the organization. Crowd-funding through the internet has attracted money mainly to social and non-profit causes, and rules often do not yet permit equity and fixed-income support through the channel. Hybrids such as mezzanine finance in the middle of the seniority scale have been applied for speculative grade transactions but can depend on government and development institution support. Venture capital is active across the range of OECD members but still has not recovered to pre-crisis levels despite additional tax and training incentives. Public listings through dedicated stock market tiers have not caught on with both demand and supply constraints. Company owners lack the confidence and education for the process and post-offering liquidity is low and micro and macro data are sparse on performance and policy for successful efforts.

The 2015 annual “scorecard” for SMEs based on findings through end-2013 showed a drop in payment delays and uneven bankruptcy record. European non-performing loans spiked, and governments tried to step into the breach with guarantee and equity sponsor schemes. Long-term maturities have been reduced in particular, and interest rate spreads widened relative to bigger firms. Half of credit was collateralized, and rejection rates were 30-50 percent in several emerging market cases. Seed and early stage venture investment remained under 2008 numbers and stock market launches were mixed while leasing growth was a bright spot.

Turkey’s G-20 presidency has emphasized new financing options under its 3Is thrust—implementation, investment and inclusion—heading into the November summit. Deputy Prime Minister Babacan, who may stay in the post although he must leave parliament under the three term limit, has taken steps at home to align debt and share tax treatment and promote private equity. Washington’s chief development finance arm OPIC has pressed Congress for more power to take capital stakes although it still has $10 billion in unused budget authority attributed to lack of personnel. Into the 2016 presidential election advocates have tabled proposal for a combined government-wide entity absorbing AID, Trade and Development Agency and other capabilities to overhaul almost 50-year old quasi-commercial designs.

Bank Conditions’ Crude Unrelenting Cry

2014 May 15 by

The IIF’s Q1 bank officer sentiment index drawn from 150 responses showed another point and a half drop to 48 as demand and supply deteriorated in Europe and Latin America in particular, and trade finance became more difficult. Consumer and housing loans were off on tighter global standards despite stability in external funding as NPL levels are due to rise, although Central Europe suffered from geopolitical jitters affecting company lines as well despite investment recovery. Asia was battered by high personal debt levels while the Middle East and Africa were not as damaged given their lower credit bases. However these two regions depend on cross-border export facilities that have become scarcer and more costly without the domestic backstops available elsewhere and they may have to tap outside official help to relieve a persistent crunch. In the Vienna Initiative countries figures from 2013’s last quarter reflected sizable reductions to Bulgaria, Hungary and Slovenia as well as Russia before the onset of the Ukraine crisis. The area’s average loan-deposit ratio was down to 110 percent as consumers deleveraged since 2008, but face a new budget and inflation threat with the potential cutoff of Russian energy, although Poland and Slovakia have reserve stockpiles and other neighbors can access alternatives. Eurozone peripheral members could likewise face renewed pressure on this front causing another accumulation of ECB Target 2 imbalances which improved 50 percent under IMF-EU adjustment programs in the final stages. Greece and Portugal now run prudent budgets and current account surpluses and have successfully returned to commercial bond markets without seeking additional bilateral or multilateral support. Hungary’s central bank has tightened foreign exchange exposure limits and ended overseas holding of the two-week Treasury bill in an effort to re-establish domestic lender dominance following the path charted in the Orban administration’s first term. Fitch Ratings assigned a stable outlook for Slovenia despite likely reshuffling of the top political leadership as bad assets were transferred to a central management agency and all 2014 external debt needs were met at low yields. The economy remains in recession and pension reform and privatization are erratic but talk of emergency rescue which crested post-Cyprus has quieted. Even with capital controls still in place the island has resumed voluntary private bond placement with a 6-year 6.5 percent London Stock Exchange listing.

The hard currency EMBI and CEMBI benchmarks have outperformed as retail fund inflows resume according to EPFR and monthly positive portfolio inflows are heavily weighted to bonds as calculated by the IIF’s 30-country tracker. Through April sovereigns have raised $50 billion and corporates $125 billion about half the full-year forecasts by major houses notwithstanding the disappearance of Russian borrowers shunned by creeping sanctions. Investment-grade governments like Romania and Turkey were oversubscribed and junk paper from Pakistan, Sri Lanka, Lebanon and Zambia also recently mixed in the contrasting immutable mania.

Offshore NDFs’ Dubious Deliverables

2014 March 25 by

After calculating non-deliverable forwards, where non-resident investors can take synthetic positions in controlled currencies, as a “tiny fraction” of foreign exchange trading, the BIS in a new paper sets likely future direction for these derivatives where they combine with onshore and deliverable markets involving actual transfer short of outright liberalization as their hedging and speculative role “fades away.” The 2013 Triennial Survey put daily volume at $125 billion with London accounting for one-third but Asian centers conduits for the Chinese renimbi and Korean won with comparable offshore size over 15 billion. The Brazilian real and Indian rupee show similar activity, while the Russian ruble features in one-quarter of the other popular units for these contracts settled in dollars for the difference between an agreed upon rate in advance and the spot reading at maturity.  During last year’s Federal Reserve tapering scare NDFs were an “adjustment valve” for offloading bond risk, the analysis comments. Smaller exposures in markets like the Chilean peso and Peruvian sol were slashed as global regulators led by the US and Europe demanded “high-frequency and granular” reporting, and the New York-based DTCC now tracks $50 billion through its accounts each day. Regressions suggest that the NDF quote influences domestic values more during volatile periods as measured by the VIX. As to evolution, restrictions on forward buying and selling tend to disappear gradually and even with convertibility as with the ruble almost a decade ago the segment remains active. Korea has lifted curbs “cautiously” and banks arbitrage the onshore and external NDF markets and deal in a range of related swaps and options. Forwards are divided but non-deliverable consolidation in a central transparent platform should boost liquidity. Yuan internationalization is “idiosyncratic” as offshore deliverables and non-deliverables compete as the former went to $7 billion daily since 2010 introduction. Official investors favor this Hong Kong route and hedge funds have jumped in as for technical reasons it better tracks the onshore rate.

Until the recent downward move which may have been engineered by authorities to hurt these players, the one-way appreciation bet since dollar band loosening was immensely profitable and spawned a bevy of associated structured products. The managed exchange rate regime will not change in the near term according to the latest financial reform announcements and analyst consensus is for strengthening below 6/dollar by year-end. However the sudden blip underscored confusion about the new leadership’s monetary policy as it tries to squeeze property and shadow banking channels at the same time the 7.5 percent GDP growth target was reaffirmed through maintaining state bank industrial and infrastructure lines. These institutions are also large issuers and buyers in the $1 trillion corporate bond market where the first domestic default by a solar firm was a minor watershed as it also owes trusts which too may feel an initial sting, although the broader message of credit due diligence has yet to be delivered.

 

 

Bank Lending’s Lurking Doom Loop

2013 November 7 by

The IIF’s Q3 scan of 135 banks’ credit climate in major emerging market regions modeled on the US Federal Reserve pulse-taking registered the weakest score in two years at 48, with “sharp deterioration” in local and international funding lines particularly in Asia. Europe continues to experience “soft” demand, while in Latin America trade finance was hit by global commodity price decline. The Middle East-Africa saw recovery but NPLs are rising everywhere as measured by that index subcomponent. The Eurozone trend is toward stricter standards for consumer and commercial property exposure and relaxation for business and housing. Capital flow volatility brought headline fund availability below 45 and the liquidity and risk squeeze is due to worsen in the coming months, according to the officers interviewed.  Corporate bond markets are witnessing a parallel phenomenon as domestic lags external issuance since the September reawakening on defensive investor strategy emphasizing high-grades at short maturities and selective speculative ones after the early-year international portion was almost 40 percent. Credit rating downgrades outstrip upgrades and dedicated monthly fund flows are still negative by EPFR data as new ETF launches were delayed. The domestic activity slippage was noticeable in Asia with 80 percent of the total as the ADB reported a 5 percent drop in its Q2 update. Shunned groups include Chinese, Indian and Turkish banks, Indonesian resource firms and Brazilian high yield with the Batista OGX’s payment default on $3.5 billion in outstanding obligations, held by big Wall Street houses that have already hired legal and financial advisers for the complex workout with a creditor hierarchy and shutdown aversion under the bankruptcy code. Originally all forms of corporate placement were on track for another $1 trillion year, but flows may fall short as the benchmark CEMBI remain off although spread have come in to 350 basis points over Treasuries.

The IMF ‘s October annual meeting repeated warnings about a high-yield and China “bubble” based on findings in the April Global Financial Stability publication. It cited equity stagnation the past five years as foreign currency business borrowing jumped 50 percent including through floating-rate short-term loans. Despite “healthy” average interest coverage and overseas liabilities within “historic” patterns cost and earnings shocks are likely with current debt-equity ratios, it suggested. The measure will soon range above the 2008 high for the most leveraged quarter of the Asian and Latin American universe at 200-300 percent, as the load as a portion of GDP tops 10 percent. Sovereign wealth funds whose assets have nearly doubled to $5.5 trillion over the period, according to the annual review by alternative investment tracker Prequin, could offer potential backing, but they tend toward ultra-conservative fixed-income allocation. The tabulation shows 85 percent of the pools in the debt asset class, as with the Abu Dhabi Investment Authority which has a subset of emerging market bonds in its estimated $625 billion portfolio apart from company conditions.