Bank Lending’s Lurking Doom Loop
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.
