Archive for September 26th, 2008
Is Another Third World Debt Crisis in the Offing?
Is Another Third World Debt Crisis in the Offing?
Global Fallout from Wall Street’s Meltdown
While taking a significant toll on public revenues , repayment of public debt has, since 2004, ceased to be a major concern for most middle-revenue countries and for raw material exporting countries in general. In fact the majority of governments of these countries are having no trouble finding loans at historically low interest rates. However, the debt crisis that hit the advanced industrial countries in 2007 could radically change the conditions of indebtedness in developing countries in the near future. Are we approaching the onset of another debt crisis in developing countries? The question requires thought, because if such is the case, we need to be prepared and take appropriate measures to limit the damage.
The historical facts
The last two centuries in the history of capitalism saw several international crises (three in the 19th century and two in the 20th ), which directly shaped the fate of emerging countries. The origin of these crises and the moment at which they peaked are closely related to the pace of the world economy, and particularly, to that of the advanced industrial countries. Each debt crisis was preceded by an abnormal boom in the countries of the centre, with an excess of capital being partly recycled into the economies of the periphery. The crisis was generally triggered by a recession or crash affecting some of the main industrialised economies.
Easy money
In the past few years, many developing countries have seen their export revenues soar thanks to the rising prices of goods they sell on the world market: hydrocarbons (oil and gas), minerals and agricultural products. This allows them to draw on these foreign exchange revenues to repay the debt and be credible candidates for new loans.
In addition, the commercial banks of the North, who had pulled back on loans at the end of the 1990s after the financial crises in developing countries, gradually re-opened the credit lines starting in 2004-2005 . Other private financial groups (pension funds, insurance companies, hedge funds) have given credit to developing countries by buying bonds that these countries issued on the leading stock exchanges. States have also increased their offers of credit to developing countries, for example China, which has been on a widespread lending spree and Venezuela, which finances Argentina and the Caribbean countries. In general, the interest rates and the risk premiums are far below those that prevailed up to the early 2000s. We should also mention the substantial credit granted within developing countries by local or foreign banks operating in the South.
The situation is changing
Things changed when the private debt crisis hit the advanced industrial countries in 2007 . This crisis was triggered by the bursting of the speculative real estate bubble in the US which brought about the collapse of several private debt markets (subprimes, ABCP, CDO , LBO , CDS , ARS , etc.). This crisis is far from over and the world is only now feeling the impact of its repercussions.
While there was a veritable flood of credit up to July 2007, the various private sources suddenly dried up in the North. Private banks that were tied up in shaky debt packages began to distrust each other and were reluctant to lend money. The authorities of the US, Western Europe and Japan had to inject huge liquidities on several occasions (hundreds of billions of dollars and euros) to prevent the North’s financial system from collapsing. During this time, private banks that financed themselves by selling non-guaranteed certificates could no longer find buyers for these on Northern financial markets. They had to clean up their books and write off the huge losses incurred by their risky operations of the previous years. To keep afloat they had to call in fresh money, provided by the sovereign-wealth funds of Asian and Gulf countries. Banks that could not find fresh money in time were acquired by others (Bear Stearns was bought by JP Morgan) or by the State (Northern Rock Bank was nationalised by the British government). Some of them did not escape bankruptcy. Freddie Mac and Fannie Mae, two North-American mortgage giants, were in virtual bankruptcy in July 2008. These two institutions were privatised during the neo-liberal wave but were State guaranteed. Their mortgage portfolio amounts to some $5,300 billion (the equivalent of four times the external public debt of all developing countries). Washington nationalised them at the beginning of September 2008 . Ten days after the Freddie Mac and Fannie Mae nationalisation, other US financial giants also fell: bankruptcy of Lehman Brothers, nationalisation of AIG (the biggest insurance company worldwide) to forestall bankruptcy, a Bank of America buyout of Merrill Lynch,…At present, Morgan Stanley and Goldman Sachs are struggling for survival, or rather, they are negotiating their mergers with or buyouts by groups that are more financially sound. At the root of the collapse of Bear Stearns, Lehman Brothers and AIG, is the collapse of the CDS market. US capitalism is facing its worst crisis since 1929 and the government is attempting a damage limitation process through a rescue package that will end up costing over 700 billion dollars. The current crisis has a global dimension and the consequences for developing countries will be very important.
At first, most developing countries were not affected
At first, the stock exchanges of many developing countries saw an influx of speculative money that was eager to flee the epicentre of the crisis, in other words, the US. The capital released by the bursting of the real-estate bubble which swept the Atlantic from West to East and struck Ireland, Great Britain and Spain (the list will get longer in the coming months) took refuge in other markets: the raw materials and food product markets in the North (thus further increasing prices) and certain stock markets in the South .
On another front, the decision of the US Federal Reserve to periodically lower its interest rate target also lightened – at least provisionally – the South’s debt burden. Meanwhile the price of raw materials remained high, allowing exporting countries in the South to garner some large revenues.
Will the developing countries continue to build up large revenues from their exports?
Slower economic growth, already being felt in North America, Europe and Japan, will lead to less exports of manufactured products, mainly by China and other Asian countries. China’s domestic demand will not be enough to compensate for the drop in external demand.
The slowdown of economic activity in the industrialised countries, China and other Asian countries with a high consumption of raw materials (Malaysia, Thailand, South Korea, etc.) should eventually bring down the price of hydrocarbons and other raw materials. Of course the price of oil could remain high if OPEC were to agree to reduce the oil offer or if a major producer was prevented from producing oil at the normal rate (an attack on Iran by Israel and/or the US; a possible social and political crisis in Nigeria or elsewhere; a natural disaster in this place or that) and if speculators riding on the high wave continue buying into oil.
The future of exported food prices will depend on a number of factors. In order of importance: continued increase (or not) in agrofuel production, continued speculation on the food product exchanges, crop results (cereals should be on the rise in Europe), which are influenced in particular by climate change.
To this should be added the eventuality of less remittances by migrants to their native countries. Mexican, Ecuadorian and Bolivian workers in the US construction industry are directly affected by the real estate crisis and are fast losing their jobs. The Bank for International Settlements has underlined this trend:
“In addition to lower capital inflows, a slowdown in the advanced industrial economies would also lead to a decrease in workers’ remittances. This could have particularly large effects in countries in Central America, Mexico, India and the Philippines, thus increasing their external financing needs relative to the more comfortable circumstances of the past few years .”
To sum up, there is no guarantee that the substantial foreign currency revenues of those exporting countries that benefited most from them will continue. On the contrary, they are likely to diminish in the next few years.
Tighter loan conditions and a possible loss of revenues
But the uncertainty is not only about revenues: spending may also see wide variations.
According to the authors of the BIS 2008 Annual Report, the present trend for banks to reduce their credit offer is likely to last and even get stronger. In many cases, variable rate loans granted by banks of the North to developing countries are indexed on Libor (London Inter Bank Offered Rate), which is very volatile and tends to rise.
The losses that banks have to absorb have been at a high since 2007. The number of debt payment defaults is on the rise in the North. The Credit Default Swaps market, these unregulated credit derivative contracts that were supposed to protect debt holders against the risk of payment default, is in a state of uncertainty because the sums involved are so enormous.
The outcome is obvious: banks and other institutional investors are thinking twice before granting new loans and when they do grant them, they impose tougher conditions . And this is just the beginning. In June 2008, the BIS wrote:
“In this setting, sovereign spreads in other words the risk premiums that public authorities pay to lenders remain well below the levels observed in past periods of financial turbulence, but are significantly higher than they were in the first half of 2007, highlighting the risks that financing constraints could become binding” . A little further on, the BIS added: “As for the corporate sector, corporate bond spreads have recently widened more than sovereign spreads in a number of EMEs, indicating that some borrowers are starting to face tighter financing conditions after many years of easy borrowing .”
Furthermore, according to the BIS Annual Report, the countries most at risk are South Africa, Turkey, the Baltic states and those of Central and Eastern Europe, like Hungary and Romania (in the last two the real estate bubble is about to burst, while to make things worse loans have been indexed on strong currencies, the Swiss franc in particular).
“In view of the turmoil engulfing banks in advanced industrial economies, the second major vulnerability in some EMEs concerns the sustainability of bank-intermediated capital flows. Historically, bank flows have periodically been subject to sharp reversals, such as during the early 1980s in Latin America and during 1997-1998 in emerging Asia” .
Conclusions
As a result of the crisis affecting advanced industrial countries, loan conditions will certainly tighten for developing countries. The large currency reserves that they have been able to build up over recent years will serve as a buffer against the consequences of tighter conditions, but will not be sufficient to protect them entirely. Certain weak links in the South’s indebtedness chain are in danger of being directly affected in the near future, all the more so since some of them have already been severely affected by the world food crisis of 2008. It is vital therefore to closely follow a situation that is presently uncontrolled, and prepare to find solutions. Otherwise the people will once again have to pay the highest price .
Eric Toussaint, president of the Committee for the Cancellation of Third World Debt – Belgium www.cadtm.org , author of The World Bank: A Critical Primer, Pluto, London, 2008.
Translated by Judith Harris in collaboration with Diren Vanlayden.
http://www.counterpunch.org/toussaint09252008.html
Army deploys combat unit in US for possible civil unrest
Army deploys combat unit in US for possible civil unrest
Bill Van Auken, WSWS
For the first time ever, the US military is deploying an active duty regular Army combat unit for full-time use inside the United States to deal with emergencies, including potential civil unrest.
Beginning on October 1, the First Brigade Combat Team of the Third Division will be placed under the command of US Army North, the Army’s component of the Pentagon’s Northern Command (NorthCom), which was created in the wake of the September 11, 2001 terrorist attacks with the stated mission of defending the US “homeland” and aiding federal, state and local authorities.
The unit—known as the “Raiders”—is among the Army’s most “blooded.” It has spent nearly three out of the last five years deployed in Iraq, leading the assault on Baghdad in 2003 and carrying out house-to-house combat in the suppression of resistance in the city of Ramadi. It was the first brigade combat team to be sent to Iraq three times.
While active-duty units previously have been used in temporary assignments, such as the combat-equipped troops deployed in New Orleans, which was effectively placed under martial law in the wake of Hurricane Katrina, this marks the first time that an Army combat unit has been given a dedicated assignment in which US soil constitutes its “battle zone.”
The Pentagon’s official pronouncements have stressed the role of specialized units in a potential response to terrorist attack within the US. Gen. George Casey, the Army chief of staff, attended a training exercise last week for about 250 members of the unit at Fort Stewart, Georgia. The focus of the exercise, according to the Army’s public affairs office, was how troops “might fly search and rescue missions, extract casualties and decontaminate people following a catastrophic nuclear attack in the nation’s heartland.”
“We are at war with a global extremist network that is not going away,” Casey told the soldiers. “I hope we don’t have to use it, but we need the capability.”
However, the mission assigned to the nearly 4,000 troops of the First Brigade Combat Team does not consist merely of rescuing victims of terrorist attacks. An article that appeared earlier this month in the Army Times (“Brigade homeland tours start Oct. 1″), a publication that is widely read within the military, paints a different and far more ominous picture.
“They may be called upon to help with civil unrest and crowd control,” the paper reports. It quotes the unit’s commander, Col. Robert Cloutier, as saying that the 1st BCT’s soldiers are being trained in the use of “the first ever nonlethal package the Army has fielded.” The weapons, the paper reported, are “designed to subdue unruly or dangerous individuals without killing them.” The equipment includes beanbag bullets, shields and batons and equipment for erecting roadblocks.
It appears that as part of the training for deployment within the US, the soldiers have been ordered to test some of this non-lethal equipment on each other.
“I was the first guy in the brigade to get Tasered,” Cloutier told the Army Times. He described the effects of the electroshock weapon as “your worst muscle cramp ever—times 10 throughout your whole body.”
The colonel’s remark suggests that, in preparation for their “homefront” duties, rank-and-file troops are also being routinely Tasered. The brutalizing effect and intent of such a macabre training exercise is to inure troops against sympathy for the pain and suffering they may be called upon to inflict on the civilian population using these same “non-lethal” weapons.
According to military officials quoted by the Army Times, the deployment of regular Army troops in the US begun with the First Brigade Combat Team is to become permanent, with different units rotated into the assignment on an annual basis.
In an online interview with reporters earlier this month, NorthCom officers were asked about the implications of the new deployment for the Posse Comitatus Act, the 230-year-old legal statute that bars the use of US military forces for law enforcement purposes within the US itself.
Col. Lou Volger, NorthCom’s chief of future operations, tried to downplay any enforcement role, but added, “We will integrate with law enforcement to understand the situation and make sure we’re aware of any threats.”
Volger acknowledged the obvious, that the Brigade Combat Team is a military force, while attempting to dismiss the likelihood that it would play any military role. It “has forces for security,” he said, “but that’s really—they call them security forces, but that’s really just to establish our own footprint and make sure that we can operate and run our own bases.”
Lt. Col. James Shores, another NorthCom officer, chimed in, “Let’s say even if there was a scenario that developed into a branch of a civil disturbance—even at that point it would take a presidential directive to even get it close to anything that you’re suggesting.”
Whatever is required to trigger such an intervention, clearly Col. Cloutier and his troops are preparing for it with their hands-on training in the use of “non-lethal” means of repression.
The extreme sensitivity of the military brass on this issue notwithstanding, the reality is that the intervention of the military in domestic affairs has grown sharply over the last period under conditions in which its involvement in two colonial-style wars abroad has given it a far more prominent role in American political life.
The Bush administration has worked to tear down any barriers to the use of the military in domestic repression. Thus, in the 2007 Pentagon spending bill it inserted a measure to amend the Posse Comitatus Act to clear the way for the domestic deployment of the military in the event of natural disaster, terrorist attack or “other conditions in which the president determines that domestic violence has occurred to the extent that state officials cannot maintain public order.”
The provision granted the president sweeping new powers to impose martial law by declaring a “public emergency” for virtually any reason, allowing him to deploy troops anywhere in the US and to take control of state-based National Guard units without the consent of state governors in order to “suppress public disorder.”
The provision was subsequently repealed by Congress as part of the 2008 military appropriations legislation, but the intent remains. Given the sweeping powers claimed by the White House in the name of the “commander in chief” in a global war on terror—powers to suspend habeas corpus, carry out wholesale domestic spying and conduct torture—there is no reason to believe it would respect legal restrictions against the use of military force at home.
It is noteworthy that the deployment of US combat troops “as an on-call federal response force for natural or manmade emergencies and disasters”—in the words of the Army Times—coincides with the eruption of the greatest economic emergency and financial disaster since the Great Depression of the 1930s.
Justified as a response to terrorist threats, the real source of the growing preparations for the use of US military force within America’s borders lies not in the events of September 11, 2001 or the danger that they will be repeated. Rather, the domestic mobilization of the armed forces is a response by the US ruling establishment to the growing threat to political stability.
Under conditions of deepening economic crisis, the unprecedented social chasm separating the country’s working people from the obscenely wealthy financial elite becomes unsustainable within the existing political framework.
Possible Panic Selling of U.S. Debt – WaMu becomes the biggest bank to fail in US history – Panic at Fortis!
Possible Panic Selling of U.S. Debt –
WaMu becomes the biggest bank to fail in US history –
Panic at Fortis!
Fortis fell as much as 15 percent in Brussels trading after De Telegraaf reported that clients of Dutch unit ABN Amro Holding NV may be moving to other banks.
Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
An agreement is needed so that no nation rushes to sell, “causing a collapse, Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations. ”
Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says
By Kevin Hamlin
Sept. 25 (Bloomberg) — Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.
“We are in the same boat, we must cooperate, Yu said in an interview in Beijing on Sept. 23. “If there’s no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.
An agreement is needed so that no nation rushes to sell, “causing a collapse,” Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.
China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank’s monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.
“Whether some kind of agreement between them to continue to hold Treasury bills is viable, I’m not sure, said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. “It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it’s something to be avoided.
The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.
`Grave Threats’
U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing “grave threats” to its financial stability.
China’s huge holdings of U.S. debt means it must bear a large proportion of the “burden of sorting things out in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every “couple of days is keeping Chinese leaders informed and helping to avoid a potential panic, he added.
“China is very worried about the safety of its assets, he said. “If you want China to keep calm, you must ensure China that its assets are safe.
Currency Manipulator
Yu said China is helping the U.S. “in a very big way” and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
“It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that, he said. “China knows what to do. We don’t need your intervention.
The U.S. financial crisis had taught China a lesson and that was: “Why are we piling up these IOUs if they may default?” China’s economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.
“Our export-growth strategy has run its natural course, he said. “We should change course.
China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.
Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating “IOUs from the U.S., said Yu. “This is paper and it may default and it will not increase China’s national welfare.
If China doesn’t allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.
http://bloomberg.com/apps/news?pid=20601087&sid=anZHfo6tQi60&refer=home
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WaMu becomes biggest bank to fail in US history
By Madlen Read, AP Business Writer
JPMorgan Chase buying Washington Mutual’s assets for $1.9 billion after FDIC seizes bank
NEW YORK (AP) — As the debate over a $700 billion bank bailout rages on in Washington, one of the nation’s largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.
The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift’s banking assets to JPMorgan Chase & Co. for $1.9 billion.
Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country’s history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.
One positive is that the sale of WaMu’s assets to JPMorgan Chase prevents the thrift’s collapse from depleting the FDIC’s insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation’s most momentous financial crisis since the Great Depression.
Because of WaMu’s souring mortgages and other risky debt, JPMorgan plans to write down WaMu’s loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.
“We’re in favor of what the government is doing, but we’re not relying on what the government is doing. We would’ve done it anyway,” JPMorgan’s Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.
WaMu is JPMorgan Chase’s second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world’s largest insurer, getting taken over by the government.
JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital.
The downfall of WaMu has been widely anticipated for some time because of the company’s heavy mortgage-related losses. As investors grew nervous about the bank’s health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor’s that put it in danger of collapse.
WaMu “was under severe liquidity pressure,” FDIC Chairman Sheila Bair told reporters in a conference call.
“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” Bair said in a statement. “For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning.”
Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain’s Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.
The seizure by the government means shareholders’ equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed.
WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu’s home loan portfolio, namely its “option” adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.
Problems in WaMu’s home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.
At the start of 2007, following the release of the company’s annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.
As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.
At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.
In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.
The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.
JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu’s banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies’ branches.
The WaMu acquisition would add 50 cents per share to JPMorgan’s earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.
“This is a definite win for JPMorgan,” said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu’s portfolio.
AP Business Writers Marcy Gordon in Washington and Sara Lepro in New York contributed to this report.
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Fortis Declines After Report Dutch Clients Are Moving
Sept. 26 (Bloomberg) — Fortis fell as much as 15 percent in Brussels trading after De Telegraaf reported that clients of Dutch unit ABN Amro Holding NV may be moving to other banks.
Fortis was down 54 cents, or 8.3 percent, to 5.99 euros by 11:07 a.m., extending yesterday’s decline of 6.3 percent and valuing the bank at 14.1 billion euros ($20.5 billion). Fortis management will address television and radio reporters today in reaction to market events, spokeswoman Liliane Tackaert said.
“We will not be issuing any statement, she said. “It is not major news.
Fortis agreed to acquire the Dutch consumer banking operations of ABN Amro last year, though the banks still operate separately. Jan Peter Schmittmann, head of ABN Amro Netherlands, told De Telegraaf that questions about Fortis’s liquidity have led some ABN Amro clients to defect. He said there is no need for customers to be concerned about ABN Amro’s liquidity or solvency.
The developments surrounding Fortis don’t influence ABN Amro or its clients’ savings, ABN Amro said in a statement posted on its Web site late yesterday. Jeroen van Maarschalkerweerd, a spokesman for the Dutch lender, denied there’s been an outflow of customers’ savings.
“As we, as ABN Amro, are still operating completely separated from Fortis, the current stock market situation, and that of Fortis in particular, have no influence on our stability and solvability,” the bank said in its statement.
Bond Risk Rises
Fortis Chief Executive Officer Herman Verwilst said Sept. 20 the firm may sell more assets than anticipated as it becomes harder to raise money. It needs to replenish capital after paying 24.2 billion euros for part of ABN Amro and writing down 682 million euros on structured investments.
Fortis denied speculation yesterday that Rabobank Groep, the biggest Dutch mortgage lender, was assisting with funding.
The cost of protecting Fortis bonds from default soared to a record, according to traders of credit-default swaps.
Contracts on Belgium’s biggest financial-services firm by assets jumped 182 basis points to 454, according to CMA Datavision prices at 10:05 a.m. in London. Credit-default swaps on the Brussels-based lender’s subordinated debt rose 254 basis points to 692, CMA prices show.
A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline signals the opposite.
