Saturday, October 29, 2011

Big Banks

Published October 29, 2011
The case against scale in Wall Street
Breaking up big global banks, curbing their growth beyond a certain size would be a sensible demand


'FROM Seattle to Sydney, protesters have taken to the streets. Whether they are inspired by the Occupy Wall Street movement in New York or by the indignados in Madrid, they burn with dissatisfaction about the state of the economy, about the unfair way that the poor are paying for the sins of rich bankers, and in some cases about capitalism itself,' this was how The Economist began its editorial on 'Capitalism and its critics - Rage against the machine'.


Excesses of the financial sector manifest themselves in a variety of ways: in how powerful these institutions have become, in the systemic risk they pose to the global economy, in the monetary rewards they appropriate for themselves
'In the past it was easy for Western politicians and economic liberals to dismiss such outpourings of fury as a misguided fringe. In Seattle, for instance, the last big protests (against the World Trade Organization, in 1999) looked mindless. If they had a goal, it was selfish - an attempt to impoverish the emerging world through protectionism. This time too, some things are familiar: the odd bit of violence, a lot of incoherent ranting and plenty of inconsistency. The protesters have different aims in different countries. Higher taxes for the rich and a loathing of financiers is the closest thing to a common denominator, though in America, polls show that popular rage against government eclipses that against Wall Street.'
I read this article in the wee hours of the morning, on one of those nights when sleep eluded me. So the current protesters have no coherent demand, as opposed to the 'mindless' goal of the demonstrators who staged protests against the World Trade Organization (WTO) in Seattle in 1999.

What would be a good demand for these protesters, I thought to myself.

To get to that, first, we have to decide what are some of the problems the world is facing now, and what are some of the complaints of the masses.
To me, one big problem is the stubbornly high unemployment rate. In the US, unemployment remains close to 10 per cent. The rate is higher among younger people. In America 17.1 per cent of those below 25 are out of work. Across the European Union, youth unemployment averages 20.9 per cent. In Spain, it is a staggering 46.2 per cent.

Two, the excesses of the financial sector. The excesses manifest themselves in a variety of ways: in how powerful these institutions have become, in the systemic risk they pose to the global economy, in the monetary rewards they appropriate for themselves. Their size, and the phenomenon of 'too big to fail', have created moral hazard among the bankers, which has led to a ludicrous situation where gains are privatised, and the losses are socialised, as Nassem Taleb, the author of The Black Swan puts it.

Three, because of the huge amounts of money controlled by a few global institutions, these big players are able to move their funds around the world at a click of a button and cause significant volatility to global asset prices. Plunges of 20-30 per cent in asset prices are no longer an outlier event. This has spooked retail investors away from the market, leaving the global financial markets the playground of a select few.

Four, behavioural psychologists have identified humans' tendency to anchor. It has been documented that when people make quantitative estimates, their estimates may be heavily influenced by previous values of the item. For example, it is not an accident that a used car salesman always starts negotiating with a high price and then works down. The salesman is trying to get the consumer anchored on the high price so that when he offers a lower price, the consumer will estimate that the lower price represents a good value.

So by the same token, say, for a trader who generates a profit of $1 million or $2 million a year for the company, a compensation of say $100,000 to $200,000 may be deemed fair. But if the same trader were to be given funds of $10 billion to trade, he will most certainly sniff at a compensation of $100,000 or $200,000 a year.

So in other words, the concentration of funds in a few big global institutions has allowed for these bankers to demand humongous bonuses.
So in my view, a sensible demand of the Occupy Wall Street protesters would be for the world to break up the big global banks, and curb their growth beyond a certain size. This can be made into an agenda at the WTO. While in its current form, the WTO negotiations revolve around getting countries to agree to dismantle trade barriers such as subsidies, tariffs, quotas etc, an added new agenda could be to get countries to agree to curb the size of their banks and financial institutions.

What would be some of the benefits of such a development?
One, employment can be created. Instead of x number of economists, accountants, risk managers each working for just three big banks in the country, by breaking up the banks into, say, 30 smaller ones, the requirement for economists, accountants, risk managers and so forth would be greatly enhanced.

Two, breaking up the banks would eliminate much of the risks that the financial sector now poses to the global economy. The failure of any one bank would not threaten to bring down the global economy. Governments will not feel obliged to bail them out. Banks will be more responsible for their actions, they can go bankrupt, just like any other business if they are reckless in their decisions.

Three, with more participants come more varied views. Hopefully we will have less of a herd mentality. No one trade can move the market. Fund managers and traders have an incentive to seek out inefficiencies or mispricing in the market, instead of attempting to move the market by sheer bulk.

Shrinking bank bonuses
Four, bonuses for the bankers will shrink automatically.

Five, smaller institutions encourage more personalised service. This promotes a sense of community. Bankers may return to the days when they make recommendations based on what's good for their clients, not the con-the-customers-for-the-benefit-of-our-banks-and-our-bonuses mentality that, sadly, global banking has deteriorated into.

As for the size of the institutions, perhaps a good benchmark would be for the financial institutions to be no bigger than, say, 5 per cent of the GDP of the biggest country in the world. This would still allow banks from smaller countries to globalise and grow.

As I argued in my earlier column, on the whole, a larger number of smaller companies would result in lower profit margins and return on equity for companies. But on the flip side, more people could share in that profit pool. Also, we would create an ecology of myriad smaller companies that are likely to have more room to try new things and are less homogeneous in their thinking. Not at all a bad thing.



My Thots....

Moot Points.
The big word used by Basel is SIFI ---- Systemically  Important Financial Institutions.
But try, say applying it to the Sg context, and U would get a sense of the difficulties involved.
In Sg, try telling that to the Big 3, DBS, UOB and OCBC.
Will they agree to down size ?
Would it makes sense to have more banks, say breakup UOB back into UOB & OUB; breakup DBS into DBS & POSB and grant a bank license to HLF?

Eurozone news
Greek deal may imperil sovereign CDS market

LONDON | Fri Oct 28, 2011 1:42pm EDT

LONDON Oct 28 (Reuters) - The future of the Credit Default Swap (CDS) market -- used to hedge against the risk of a country defaulting -- may be at risk if these derivative instruments do not pay out after this week's rescue deal for Greece.An implosion of the sovereign CDS market could lead investors to buy fewer government bonds because they feel they cannot protect themselves, and risks pushing up borrowing costs for governments, especially in the euro zone.

Private sector creditors such as insurers, banks and funds will take losses of 100 billion euros on their Greek debt holdings under a new bailout pact struck this week, sharing the burden of the costly rescue with taxpayers.

But the International Derivatives and Securities Association (ISDA) -- a bank lobby that also decides whether an event triggers the CDS -- has said it's not likely that the restructuring would lead to a pay-out.

"The CDS market is being keelhauled. This certainly isn't going to help, because why would you buy a CDS if there will never be a payout?" said one well-placed industry source, referring to the Greek situation.

He projected the sovereign CDS market -- a small corner of the $25 trillion overall market -- could die out in the next year, echoing some bankers' fears.

CDS contracts are a form of protection that entitle bondholders to a pay-out in case of a default. They are also often used by investors who do not own the underlying bonds to bet on the market -- so-called "naked" CDS.

This has made them unpopular among politicians, who have blamed speculators for exacerbating Europe's debt crisis.

The European Union agreed last week to ban naked CDS on sovereign debt, in a rule that will come into force from November 2012, already putting pressure on the sovereign CDS market even if there will be some exceptions.

A non-payout of the CDS would further take away the credibility of the market -- even if its relevance for Greece is limited: economists have estimated the net payout on Greece CDS, would only be $1.85 billion.

European politicians struck a deal with the banks in the early hours of Thursday after a night of hard-nosed negotiations, that will see them write off 50 percent of the value of their Greek government debt holdings.

The agreement with banks paved the way for a second bailout of Greece, and comes along two other measures: a forced recapitalisation of Europe's banks and bigger financing powers for Europe's EFSF bail-out fund.

The International Institute of Finance (IIF) that leads the talks from the industry side said that the deal they struck was voluntary, and that an involuntary deal could have caused a "true calamity".

"There is the unknown risk of what happens with contagion. You could have hedge funds looking at Spain or Italy after that, which could pile on pressure there and precipitate the quest for assistance," said David Watts, an analyst at CreditSights.

Banks had initially agreed to an offer for a debt exchange that would see them take a 21 percent cut. At the time, politicians and bankers also insisted that the deal had to be voluntary, to avoid a hard Greek default.

But that deal was torn up as it became clear that the conditions in Greece had rapidly deteriorated. The elements of the new agreement are unclear, and will probably have to be hammered out in the coming weeks.

The CDS market still has value for other uses, such as an insurance against a company or bank default. Sovereign CDS are also used as a proxy hedge, for instance for companies that are too small to have their own CDS in a given country.

That has been one of the main drivers of a rise in liquidity. In France, the volume was up 21 percent in the third quarter, according to data from Markit. In Germany, the rise was 14 percent, while volumes in Italy dropped 11 percent.

The problem banks and investors face is that the risk of sovereign defaults in the euro zone -- once inconceivable -- has grown more real in the past two years.

And if one of the main hedging tools disappears, that inevitably means they will be under even more pressure to reduce their exposure and start selling the bonds, pushing up the yield and therefore the financing costs for governments.


My Thots.....

The question to ask should be :--- How much of the CDS was "naked" CDS i.e. intended for naked shorting rather than used for real hedging of risks to the underlying  sovereign bonds?
The payout on the CDS bets would have amounted to USD 1.85 b. whereas the "voluntary" haircuts of 50% negotiated with IIF  will amount to losses of  100b Euros. The two just does not balance. So to suggest that CDS swaps can insure the sovereign debts is being "naive".
 IMHO, even if the ISDA ruled that the "voluntary" haircuts " were a default ; as Fitch has done so, it is immaterial, the CDS for sovereign debt mkt is "dead"----with or w/o the ban by the Eurozone countries.
When the definition of voluntary is so tenous---- who would want to risk using CDS to hedge their bets?
Only, the truly gungho cowboys shorts, truly naked and w/o underlying skin in the game but aiming for a high odds win would bet on such a risky outcome.

Friday, October 28, 2011


Published October 28, 2011
Suntec Reit sells Chijmes for $177m to Pua-linked entity
OSIM's Sim holds stake in the entity; Pua, Sim also linked to a nearby project


SUNTEC Real Estate Investment Trust (Suntec Reit) is selling Chijmes for $177 million to an entity whose shareholders include Pua Seck Guan's Perennial Real Estate group and OSIM boss Ron Sim.

Mr Pua and Mr Sim are also joint majority shareholders (40 per cent stake) in the nearby Capitol project, which will have retail/theatre, hotel and residential components.

According to a Perennial spokesperson, this acquisition provides good synergistic opportunities between the Chijmes and Capitol sites.

'We like this site because it's a good opportunity to own an iconic heritage landmark commercial site, and it's very rare to get an opportunity to invest in such a large commercial site right in the downtown core of Singapore CBD (central business district), with a low plot ratio of 0.8,' said the Perennial spokesperson.

HSBC Institutional Trust Services (Singapore), as trustee of Suntec Reit, entered into a property sale agreement with PRE 8 Investments Pte Ltd for the 154,062 sq ft plot located along Victoria Street.
With a gross floor area of 127,793 sq ft, the $177 million price tag translates into about $1,385 psf ppr (per sq ft per plot ratio). The area was valued at $143.7 million by DTZ Debenham Tie Leung (SEA) as at Oct 15, placing the divestment at 23.2 per cent above the valuation.

Suntec Reit is expected to recognise an estimated gain of about $39.5 million following the divestment.
The sale of Chijmes follows an expressions of interest exercise conducted by Colliers International.
According to Suntec Reit's results for the third quarter ended Sept 30, the property posted revenue of $2.7 million and net property income of $1.8 million during the quarter.

Going forward, PRE 8 Investments intends to spend some $40 million to rejuvenate the asset.
'In terms of efficiency of the asset, it will be enhanced; the tenancy mix will be reviewed and optimised; and in terms of ambience, a lot can be done to improve and blend it with the precinct. Over time, we hope to enhance the rental revenue from this asset.'

Chijmes has 79,794 sq ft of net lettable area and includes several conservation buildings and two gazetted national monuments - Chijmes Hall (the former CHIJ Chapel) and Caldwell House.
Chijmes is on a site with a remaining lease of about 79 years. It has 97 car park lots and is located opposite Raffles City and the City Hall MRT Station. Tenants include Lei Garden Restaurant and Harry's Bar.

The completion of the divestment is expected to be sometime in January 2012.


My Thots.......

It will be very interesting to see what the enterprising pair of Pua and Ron Sim will do to transform  the Chijmes site. ARA the manager for Suntec Reit practically slept on it and must consider themselves very lucky that they are able to unload Chijmes to the pair paid at such a high price. Poor property managers but great asset traders? - maybe,4574,462328,00.html?

Starhill Global Reit, SIAEC, AIT

Starhill Global Reit$file/StarhillGlbl3QPresentation28Oct11.pdf?openelement$file/StarhillGbl3QFinancials28Oct11.pdf?openelement$file/StarhillGlbl3QNewsRelease28Oct11.pdf?openelement$file/JPYLoanFacility.pdf?openelement

Analysts Report



Thursday, October 27, 2011

US GDP growth for 3Q2011

US GDP growth for 3Q2011
Total 2.5%

Overall, 3Q GDP growth rate is almost double 2Q GDP rate and US GDP growth appears to be on the uptrend, again. 

By Components
1) Private Consumption Expenditure (PCE)..................1.72%
2) Gross Private Domestic Investments (GPDI).............0.52%
3) Net Export of Goods & Services (NEGS)..................0.22%
4) Government consumption expenditures and................0.0%
gross investment (GCE &GI)

The Good news is that it is PCE i.e. Consumers that is driving growth.
Consumer driven growth is good not just for the US but also for those that trade with the US.
Within PCE, Durable Goods contributed 0.35% and Services was the star with 1.38%.

Within GPDI, FI (Fixed Investments) at 1.60% more than offset declines in PI (Private Inventories) -ve 1.08%.
Non Residential was the star  contributing 1.54%, with Residential showing a meek 0.05% out of the 1.60%

Net spends of 0.6% by the Federal Govt was offset by 0.6% shrinkage by Local Govts

Real DPI (disposable personal income) decreased 1.7 % (vs  an increase of 0.6 % in 2nd Q)

% PS (personal saving rate -- saving as a percentage of disposable personal income) was 4.1
% in 3Q  (vs  5.1% in 2Q).

Eurozone news
Euro zone strikes deal on second Greek package

BRUSSELS | Thu Oct 27, 2011 1:16am EDT

BRUSSELS (Reuters) - Euro zone leaders struck a deal with private banks and insurers on Thursday for them to accept a 50 percent loss on their Greek government bonds under a plan to lower Greece's debt burden and try to contain the two-year-old euro zone crisis.The agreement was reached after more than eight hours of hard-nosed negotiations involving bankers, heads of state, central bankers and the International Monetary Fund and aims to draw a line under spiraling debt problems that have threatened to unravel the European single currency project.

Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now.

At the same time, the euro zone will offer "credit enhancements" or sweetners to the private sector totaling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so that Greece has a full, second financial aid program in place before 2012.

The value of that package, EU sources said, would be 130 billion euros -- up from 109 billion euros when a deal was last struck in July, an agreement that subsequently unraveled.

"The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone," French President Nicolas Sarkozy told reporters afterwards.

As well as the deal on deeper private sector participation in Greece -- which emerged after Sarkozy and German Chancellor Angela Merkel personally engaged in the negotiations with bankers -- euro zone leaders also agreed to scale up the European Financial Stability Facility, their 440 billion euro ($600 billion) bailout fund set up last year.

The fund has already been used to provide help to Ireland, Portugal and Greece, leaving around 290 billion euros available. Around 250 billion of that will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways.

Leaders hope that will be enough to stave off any worsening of the debt problems in Italy and Spain, the region's third and fourth largest economies respectively.

The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater flexibility, the euro zone leaders said.

"The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors' responsiveness in view of economic policies," said Herman Van Rompuy, the president of the European Council.

"There is nothing secret in all this, it is not easy to explain but we are going to more with our available money, it is not that spectacular. Banks have been doing this for centuries, it has been their core business, with certain limits."

As with the July 21 agreement, which quickly broke down when it became difficult to secure sufficient private sector involvement and market conditions rapidly worsened, the concern is that Thursday's deal will only work if the fine print can be promptly agreed with the private sector, represented by the Institute of International Finance.

Charles Dallara, the managing director of the IIF, said those he represented were committed to making the deal work.

"On behalf of the private investor community, the IIF agrees to work with Greece, euro area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors with the support of a 30 billion euro official ... package," he said in a statement.

"The specific terms and conditions of the voluntary PSI (private sector involvement) will be agreed by all relevant parties in the coming period and implemented with immediacy and force. The structure of the new Greek claims will need to be based on terms and conditions that ensure (net present value)loss for investors fully consistent with a voluntary agreement."

Euro zone leaders will be hoping the agreement, which will also be accompanied by a recapitalization of the European banking sector by around 106 billion euros, will finally draw a line under a crisis that has roiled financial markets and threatened to tear apart the euro single currency project.

As with previous deals that have come unstuck, the test will be how financial markets respond once they have digested the details and picked apart the seams of the agreement.

"This is broadly what the market was expecting and I do not see any downside surprise here. Still we have to wait and see more details," said Dan Dorrow, director of research at Faros Trading in Stamford, Connecticut, speaking before the final deal was reached but after some details had emerged.

"They have good intentions and are going in the right direction. This represent a few steps away from the cliff. However, we have to wait for more concrete details but this obviously does not disappoint."
Jose Manuel Barroso, the president of the European Commission, said the final details on the Greek package, which follows a programme of 110 billion euros of loans granted to the country last year, would only be worked out by year-end.

And EU finance ministers are not expected to agree on the nitty-gritty elements of how the scaled up EFSF will work until some time in November, with the exact date not fixed.

As part of efforts to attract investors into the special purpose vehicle attached to the EFSF, Sarkozy said he would talk to Chinese President Hu Jintao in the coming days. Beijing has so far been a big buyer of bonds issued by the EFSF, which is triple-A rated by credit agencies.

Earlier, U.S. stocks rallied after news emerged of the intention to boost the power of the EFSF fund, while the euro fell as investors awaited details that are unlikely to be forthcoming until next month.

As well as the three-way package to strengthen their crisis fighting powers and try to resolve the situation in Greece, euro zone leaders called on Italy to take more rapid action on pension reforms and other structural measures to try to avoid the economy heading the same way as Greece.

Prime Minister Silvio Berlusconi has promised to raise the retirement age to 67 by 2026, and pursue other adjustments to the country's economic model, steps the EU praised but said would only be positive if they were implemented.

"The key is implementation. This is the key. It is not enough to make commitments, it is necessary now to check if they are really implementing," said Barroso.

Leaving the summit venue at 4.30 a.m., Jean-Claude Trichet, the outgoing head of the European Central Bank, said he was cautiously optimistic that the deal could help stabilize the unrest in European financial markets and economies.

"What I heard in this European Council was the expression of the will of the heads. That is in my opinion extremely important," he told reporters. "What is backing this orientation is the will, the collegial will, if I may, of the heads of state and government that are behind it. But again no complacency -- very hard work, very hard work."


My Thots.....
A comprehensive package?
Yes, by far the most comprehensive so far.
Not only does the package covers much ground, the fire power has been increased whilst the size of the possibility of a Greek default has been cut down to size with the 50% haircut; that haircut agreed with the bank lobby IIF essentially and primarily downsized the problem!!
That the deal was hammered out at 4am European time, shows the immense nature of the task.
Merkel had to get past the Bundestag and then hammer out the deal with the rest of the 17 nations with whimper boy Cameron sniping on the side.
Credit goes to Merkel, whom it seems is a wily politican, able to let the crisis roil and boil so as to create the necessary stimulus/impetus to get the divergent parties to have a stake in the solution seeking process.

How the EFSF will be leveraged remains to be negotiated but the Germans got their way--- the ECB can buy bonds to help support the bonds of Eurozone countries but with the word "peripheral" removed from between the 2 words in yellow; in the draft commuinique.
Put simply, in times of distress the ECB can buy bonds ( but the words, bonds of peripheral Eurozone countries simply could not stay in the draft).

The Recaps should work out as each national govt will be responsible for guaranteeing thier own portion of the banks and FIs --- spread out this way the sum of 100b Euros is not onerous to any one of the more highly exposed core nations (i.e. Germany & France).

For Greece, itself,  whose banks own 30% of the sovereign debt baggage, the 50% haircut probably might jsut do the trick.

2 things must happen henceforth; for the Eurozone crisis to abate-
1)  the equity mkt has voted "Yes" emphatically; which is as it is expected to  do so!!
2) Next, the spreads on the Italian and Spanish debt  to German bunds must now narrow and the CDS for insuring these bonds must plunge.

Check out No 2), for many times they have diverged and told different stories!! i.e the equity mkts and the bonds mkts differ!!

When they agree, the vigilantes have finally been deterred!!

Wednesday, October 26, 2011

Eurozone news

China to take part in eurozone bailout fund

Posted: 26 October 2011 1446 hrs

BEIJING : China and other emerging powers have agreed to help eurozone countries facing a debt crisis by taking part in a bailout fund, the China Daily said Wednesday, citing a source close to EU decision makers.

The state-owned English language newspaper said leading emerging economies would help to finance the rescue fund through the International Monetary Fund, which would boost their voting rights in the Washington-based lender.

The agreement may be written into the final document at a second emergency summit of European leaders, due to begin later Wednesday, the unidentified source told the newspaper.

Further details on China's investment were not provided.

European leaders have been toying with the idea of asking China, Brazil and other top emerging economies to come to their rescue as they scramble to find ways to boost their defences against the deepening debt crisis.

The eurozone wants to beef up its 440-billion-euro ($610 billion) European Financial Stability Facility to convince markets it has the means to protect highly indebted nations such as Italy.

China has repeatedly pledged support for the euro and eurozone countries -- major buyers of Chinese exports -- as it seeks to shore up the value of its investments and demand for its products.

Chinese foreign minister Yang Jiechi on Tuesday called on the European Union to act to restore market confidence during talks with EU foreign policy chief Catherine Ashton in Beijing.

A meeting between Chinese and European leaders scheduled to take place in China last Tuesday was postponed to make way for the second summit on the eurozone crisis.

- AFP /ls


My Thots.....

Nice Quid Pro Quo

The western dominated biz press portrayed China as an uninterested observer wrt the Eurozone crisis and touted that Brazil was the only willing party that would put money to buy bonds issued by the Eurozone member states.
As it is, Brazil's finance minister is the 1st to say big "No, thank U"; so the media got that wrong again.
China & Russia appears to be willing but tied the purchases to the IMF; meaning Europe needs to cede some of the SDRs voting rights to the BRICS, a quid pro quo that Europe (with perhaps the meddling Cameron) was prepared to do.  

Tuesday, October 25, 2011



Analyst's Reports



Analysts Reports

My Thots....
Higher rentals reversion at China Sq Central psot expiry of master lease.
Keypoint Redevelopment/Divestment.
Refinancing to reduce cost of debt.
Improving Occupancy.

Monday, October 24, 2011

Eurozone news

Sarkozy yields on ECB crisis role, pressure on Italy

BRUSSELS | Mon Oct 24, 2011 3:52am EDT

BRUSSELS (Reuters) - European Union leaders made some progress toward a strategy to fight the euro zone's sovereign debt crisis on Sunday, nearing agreement on bank recapitalization and on how to leverage their rescue fund to try to stop bond market contagion.
But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.

French President Nicolas Sarkozy backed down in the face of implacable German opposition to his desire to use unlimited European Central Bank funds to fight the crisis. Instead, the euro zone may turn to emerging economies such as China and Brazil for help in underpinning its sickly bond market.

"Further work is still needed and that is why we will take the decisions in the follow-up euro zone
 summit," European Council President Herman Van Rompuy said after chairing 12 hours of talks.
He indicated that Italy, the euro zone state now in the markets' firing line, had been told to come up with a more convincing plan this week to implement structural economic reforms to raise its growth potential.

"Between now and Wednesday, some members of the European Council will have to convince colleagues that their country is implementing the promised measures fully," Van Rompuy said.
Italian Prime Minister Silvio Berlusconi said he expected to call a cabinet meeting on Monday to discuss measures to boost growth, as Italy came under mounting pressure from European partners to step up reforms to restore market confidence.

Sarkozy acknowledged that France's proposal to multiply the firepower of the euro zone's rescue fund by turning it into a bank and letting it borrow from the ECB would not fly for now because neither Germany nor the central bank accepted it.

"No solution is viable if it doesn't have the support of all the European institutions," the French leader told a joint news conference with German Chancellor Angela Merkel.

Merkel said only two options remained on the table for leveraging the 440 billion euro ($600 billion) European Financial Stability Facility, and neither involved drawing on the central bank. Van Rompuy said, however, that some form of ECB involvement could not be entirely discounted.

Officials said the emerging solution would combine using the EFSF to provide partial guarantees to buyers of new Italian and Spanish bonds, while also creating a special purpose vehicle to attract funds from major emerging countries that could guarantee bonds in the secondary market.

It remains to be seen whether that will convince investors that euro zone government bonds are safe after expected heavy write-downs on Greek debt.

"This is not going to be the 'shock and awe' solution to really impress the markets given there are still a lot of details to be worked out and there is still a great deal of uncertainty about how this is to be implemented," WestLB rate strategist Michael Leister told Reuters.

Leaders endorsed a broad framework drafted by their finance ministers for recapitalising European banks, which regulators say need between 100 and 110 billion euros to cope with likely losses on Greek and other euro zone sovereign bonds.

Much time was spent on procedural wrangling with non-euro members Britain and Poland demanding that all 27 EU states, including the 10 that are not in the single currency, be fully involved in the crisis response. That forced the calling of another full EU summit for one hour on Wednesday.

British Prime Minister David Cameron said there was a danger that euro zone countries would otherwise start taking decisions on their own that affect the EU's single market.

With alarm growing in Washington, Beijing and other capitals about potential damage to the global economy, Europe is under pressure to put in place a comprehensive strategy in time for a November 3-4 G20 summit in France to halt the crisis.

They aim to agree on reducing Greece's debt burden, strengthening European banks, improving euro area economic governance and maximising the firepower of the EFSF.

Merkel told reporters that the decisions to be taken on Wednesday would not be the last step to overcome the crisis.

Before then, she must obtain parliamentary approval from her fractious center-right coalition for the latest series of increasingly unpopular bailout measures.

Merkel and Sarkozy began the day with a 30-minute private meeting with Italian Prime Minister Silvio Berlusconi to ram home what a German official called "the urgent necessity of credible and concrete reform steps in euro area states."

Finance ministers made progress at preparatory sessions on Friday and Saturday, agreeing to release an 8 billion euro ($11 billion) lifeline loan for Greece and to seek a far bigger write-down on Greek debt by private bondholders.

A document prepared by the ministers and seen by Reuters outlined possible guarantee schemes to help banks secure access to wholesale funding at a time when many are shut out of inter-bank lending.
The key outstanding issues were how to make Greece's debt burden manageable and how to scale up the rescue fund to shield Italy and Spain, the euro area's third and fourth largest economies, from bond market turmoil that has forced Greece, Ireland and Portugal into EU-IMF bailouts.

A debt sustainability study by international lenders showed that only losses of 50-60 percent for private bondholders would make Greek debt, forecast to reach 160 percent of GDP this year, sustainable in the long term.

"This debt is onerous and must lighten for us to breathe again," Greek Prime Minister George Papandreou told reporters.

A senior German banker close to the talks said the banks had offered to take a 40 percent "voluntary" writedown but governments were demanding they write off 60 percent.

This is much more than a 21 percent net present value loss agreed with investors on July 21 and some officials question whether it can be achieved voluntarily, or only through a forced default that would trigger wider market turmoil.

"It's a poker game until Wednesday," one negotiator said.

A Reuters poll of economists -- many of them from European banks -- showed last week they expected private investors would have to shoulder losses of around 50 percent.

Analysts say the proposed bond insurance scheme could have perverse effects and remove incentives for states like Italy to take action to reduce debt.

The European Banking Authority told European Union finance ministers on Saturday that if all such bank assets were valued at market prices, EU banks would need 100-110 billion euros of new capital to have a 9 percent core tier 1 capital ratio.

Ministers agreed to give banks until June 2012 to achieve this capital ratio, first using their own funds or from private investors, and if that fails, by using public money from governments or as a last resort the EFSF.

However, EU sources said that figure appeared to include some 46 billion euros already earmarked for bank support in the EU/IMF bailout programmes for Ireland, Greece and Portugal.

Markets may be disappointed if the actual capital injection is only 60-70 billion euros, compared to recent estimates of a need for up to 200 billion euros.


My Thots.....

Leveraging on ECB to max. firepower from EFSF
It appears, the ECB (itself) and  Germany are strongly opposed to using the ECB to leverage on the EFSF, to give max bazooka power, given the ECB's ability to print infinite amount of money.

Possible Reasons:-
1) Likely influence from the Axel Weber camp of the Bundesbank who view the job of the CB as one of  inflation targeting ; not QE, not bailouts.
2) Another reason could be that Merkel may not get a good reception by her coalition partners; bailouts meant German taxpayers will have to foot the costs of peripheral countries profligacy and Italy (Berlusconi) and others may take it as license to be lax.

So France's Sarkozy gave in; it seems.

So how will they leverage on the EFSF

Option1 --- Use the EFSF to provide a first cut guarantee to bonds issued by peripheral countries (Italy & Spain).
Option 2 --- Create an SPV to provide a 2nd tier guarantee on the bonds. Leverage on that SPV.
SPV will come from funds provided by G20 countries; cash rich countries like China, Brazil etc.

It is not clear how that SPV will work. But, it denotes the Eurozone reliance on emerging countries funds and influence.

1) Can a SPV be set up in time to provide the leverage and guarantees?

2) Another basic question is whether markets will believe in those guarantees for Spain & Italy; especially after the heavy haircuts for Greece; likely to be 40-60% ???

China news

China Officials Jailed as Government Cracks Down on Leaks of State Secrets
By Bloomberg News - Oct 24, 2011 11:02 AM GMT+0800

China sentenced two officials to jail for leaking secret economic data, state prosecutors said, as the government aims to crack down on selective disclosure in the world’s third-biggest market for equities.
Wu Chaoming, a researcher with the Finance Institute at the People’s Bank of China, was sentenced to six years in jail for intentionally revealing secret data to the securities industry, Li Zhongcheng, a state prosecutor, said in a statement. Sun Zhen, a former secretary to a deputy director in the National Bureau of Statistics, was sentenced to five years in jail for disclosing state secrets.

Indictments have also been filed in the cases of four suspects employed in the securities industry, according to Li. The government is seeking to reduce leaks of economic data such as inflation and gross domestic product figures that have given an unfair edge to some in the securities industry.

“The improvement is evident,” said Lu Ting, a Hong Kong- based economist at Bank of America Corp. unit Merrill Lynch. “It’s been very different in the past few months. There has been no leak. What circulated in the market turned out to be nothing more than rumor.”

Between June 2009 and January 2011, Sun violated provisions of the law on Guarding State Secrets by leaking 27 items of classified statistical data to employees of the securities industry, Li said. Wu leaked 25 items of classified statistical data 224 times to 15 people in the securities industry, Li said.

“There are still weak links that need to be strengthened” in terms of restricting how widely data is distributed and designating levels of secrecy, said Du Yongsheng, spokesman for the National Administration for Protection of State Secrets.

The severity of the sentence is a surprise, said Frances Cheung, a Hong Kong-based strategist at the Credit Agricole CIB.

“I think they did the right thing in order to maintain credibility, especially when you relate that to how Chinese data nowadays are market-moving and influential,” she said.


My Thots.....

Leaks give certain mkt traders an advantage; as China's data, gains gravitas and becomes closely watched, globally.
Selective disclosure whether by time or by geography or by certain influential groups should be discouraged if the data is to have importance and credibility.
Timeliness is of the essence.

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."