EU Insurers’ Long-Term Lurch
As net inflows briefly resume to EU peripheral bonds, an institutional investor council chaired by insurance giant Swiss Re under the auspices of the IIF with $20 trillion in combined assets issued a plea to redress longer-range post-crisis allocation obstacles. Financial repression steering funds to governments has been encouraged by Basel and Solvency directives and can act as a tax with negative real interest rates. One-third of treasury securities are now held on public balance sheets in advanced economies hindering proper price discovery. Regulatory reforms have created perverse incentives though a shift from equity to “safer” fixed-income and portfolio diversion to less-monitored and capital-tied alternative channels. Bank, insurer, and pension fund treatment still occur in uncoordinated “silos” which promote extra-territorial and competitive overreach, the group asserts. The new Solvency II mandated higher set-asides for infrastructure and private sector bonds than may reflect default experience and worsens the term asset shortage and duration mismatches. Current capacity is estimated by experts at 20 percent under future investment needs. EU energy, transport, and information technology projects will demand EUR 2 trillion over the next decade at a time of traditional sponsor deleveraging. A dedicated bond market as described in a recent European Commission report could be launched with supporting performance indices and tax exemptions to meet the challenge. Aging populations both in the industrial and emerging world could be trapped in an indefinite low-yield environment eroding household and retirement system values. The financial transaction tax due to go into effect in 2014 will raise around EUR 40 billion but also shave regional GDP by half a point. Liquidity will disappear especially for derivatives and the ultimate cost will be reflected in even lower real returns. The unilateral nature of the decision by officials without consulting stakeholders follows a pattern already experienced with Greece’s sovereign debt restructuring with back-dated collective action clauses. Good-faith negotiations should honor the principles contained in the IIF’s decade-old code of conduct and the IMF should fully consider the input of private creditors in conducting the signature sustainability analysis.
The workout saga has now spread to Cyprus with insolvent banks post-haircut as deposit growth was flat in 2012. The EUR 15 billion-plus rescue request is close to total GDP and approval has been postponed until after February presidential elections. EU Monetary Affairs Commissioner Rehn has downplayed the delay and the risk of euro exit as German chancellor Merkel’s party reeling from a recent state defeat questions the island’s anti-corruption and money laundering credentials. Gulf offshore haven Dubai in contrast overcame debt burden worries with a 10-year dozen times oversubscribed sukuk yielding below 4 percent. 40 percent of investors were from Europe, and non-bank funds took one-third the tranche. The emirate hailed the success as “a long way since 2009’s tough period” despite short-term repayment humps.
