On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

The best of Bloomberg Business, delivered daily.
Subscribe to the Bloomberg Business Newsletter

■ December 13, 2018, 12:01 AM EST

On the Eve of Brexit, U.S. Banks Are Set to Conquer Europe

● Exit Britain. Enter Wall Street.

By Edward Robinson, Lananh Nguyen and Yalman Onaran

With Donald Trump rattling the international order Washington built after World War II, engagement is out and isolationism is in. Yet Wall Street, an expression of American influence every bit as defining as Hollywood or Silicon Valley, apparently didn’t get the memo.

European finance—whipsawed by debt crises and political upheaval since the financial crash of 2008 and now on the verge of the Brexit trauma—is seeing just how internationalist American banks are. U.S. financial powerhouses such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have been running up the score on their European rivals, dominating investment banking overseas as never before.

The U.K.’s separation from the European Union will cleave Europe’s financial industry in half. London’s diminished role as the financial gateway to the Continent may prevent Europe from matching the U.S. with its own deep, seamless flow of capital. Brian Moynihan, the chairman and chief executive officer of Bank of America Corp., calls this effect “disaggregating liquidity.”

“That’s not going to be good for the economy,” Moynihan said at an industry conference in Boston in November. “It puts them back about 10 to 15 years in the possible development of capital markets, which is critical to a country’s success. At the end of the day, what makes the U.S. powerful is our capital markets and all the capital we can bring to the situation. That just allows us to develop wealth faster for people, and companies can access the capital a lot faster.”

The result: Wall Street’s deepening penetration into the EU. Bank of America is turning a post office in the center of Paris into a trading floor for hundreds. Goldman Sachs, Morgan Stanley, and JPMorgan are shifting capital and staff to Frankfurt, Paris, and possibly other locales. JPMorgan Chase Chairman Jamie Dimon and his peers are increasingly signing up clients for work at the expense of homegrown rivals such as Deutsche Bank AG and BNP Paribas SA. In January, for instance, JPMorgan, Morgan Stanley, and Lazard advised Belgian drugmaker Ablynx and Paris-based Sanofi on a $4 billion takeover that featured no involvement by a European investment bank. This year, five of the six top institutions handling European transactions worth $500 million to $6 billion were American, according to data compiled by Bloomberg.

It’s possible the contest between U.S. and European investment banking will shift again. In the precrisis decade, European institutions were making inroads into the new world. UBS Group AG built an airplane hangar-size trading floor in Stamford, Conn., and Barclays, Deutsche Bank, and Credit Suisse elbowed into the upper ranks for securities underwriting and mergers advice in the U.S. In 2010, top European banks raked in 51 percent of global revenue from trading equities, compared with 44 percent for American lenders.

The UBS trading floor is no more, and Deutsche Bank is the latest European bank retreating from the U.S. In equities trading this year, Wall Street commands 60 percent of global revenue, compared with Europe’s 34 percent, according to data compiled by Bloomberg. The top five U.S. investment banks earned $75 billion in the first nine months of 2018, a quarter more than the same period last year. In contrast, Deutsche Bank, which has been hobbled by CEO turnover and a round of money laundering cases, saw its shares fall to record lows in December. BNP Paribas, France’s No. 1 bank, jolted investors in the third quarter when it reported a 15 percent drop in revenue in fixed income, long considered one of its strongest businesses.

Even before Brexit, Europe struggled to overcome obstacles that would make its lenders more competitive. Brussels’ bid to unify its member states’ banking industries, for example, has foundered. “The fact that European politicians failed to produce banking union is a travesty,” says Barrington Pitt Miller, a portfolio manager with Janus Henderson Group Plc, which holds big stakes in European lenders. “If you’re a U.S. capital markets bank, you are looking at a free runway to step in and take market share.”

As if that weren’t enough, Dimon and Moynihan and their fellow Americans are riding a tailwind courtesy of the U.S. Federal Reserve—a surge in lending revenue. Over the last eight quarters, the Fed has lifted its benchmark interest rate to a range from 2 percent to 2.25 percent, which means banks can charge more for loans. The European Central Bank, nursing a fragile regional economy, has stood fast with a subzero rate. “There’s strong lending growth coming from companies in the U.S.,” says Jan Schildbach, head of research on banking, financial markets, and regulation at Deutsche Bank. “In Europe there’s only modest lending volume growth after years of contraction.”

Wall Street is doing well in Asia, too. U.S. banks take the five top spots in Asian equities underwriting, according to Bloomberg data. In the global business of trading securities, only one Asian lender, Japan’s Nomura Bank Holdings Inc., makes the top 16, with just a 1.7 percent share. In mergers and acquisitions, Asian institutions tend to show up in deals on their own turf. The Bank of China Ltd., for example, leads yuan bond underwriting.

It’s tempting for European banks to conflate the financial industry with the other sources of U.S. economic influence. The dollar continues to be the world’s reserve currency, and the U.S. Department of the Treasury has stepped up its role as a global financial cop—whether on trade with pariah states, policing money laundering, or enforcing tax laws. Foreign bankers and lawmakers bristle at what they call the “weaponization” of the dollar—how its dominance makes it harder for other countries to borrow and trade—and fear that Washington is indirectly giving Wall Street a boost by fining overseas banks billions of dollars.

The EU is starting to push back. Brussels was dismayed by the Trump administration’s withdrawal from the 2015 international agreement to curb Iran’s nuclear program and pursuit of penalties for companies that have renewed doing business with the oil-rich country. So Brussels is trying to cook up a way to get around the dollar-denominated economy to preserve commercial links with Iran.

Indeed, Trump’s willingness to undo long-standing accords on trade, security, and climate change has emboldened rival powers to challenge Washington’s reach. On Dec. 5 the EU unveiled an initiative to strengthen the euro as an alternative to the dollar by calling for companies in the financial and energy industries to denominate more trading contracts in the single currency. China is in its fifth year of rolling out its Belt and Road Initiative, a program worth hundreds of billions of dollars designed to project Beijing’s influence through myriad infrastructure and commercial ventures in dozens of nations in Africa, Asia, and Europe. Russian President Vladimir Putin, for his part, has called on nations to use their own currencies for international trade to blunt U.S. economic power.

Yet when it comes to Wall Street, the great game of geopolitics may ultimately amount to little more than noise. The industry, of course, has only one lodestar: money. And if a tectonic shift such as Brexit creates new opportunities, you can bet America’s big banks will grab a bigger share of business. Still, some fret about what will happen when the cycle turns. “The banks are never going to be terribly good at identifying what would cause them to fail,” says Paul Tucker, chairman of the Systemic Risk Council and former deputy governor of the Bank of England. “There will be a recession at some point, and people will lose money. The economy relies on these banks, and so they need to be able to withstand a lot of stress.”

Theoretical fears of some future downturn aren’t likely to put off Wall Street from making money today. And in the pursuit of profit, America’s global financial profile will grow only more prominent. “That old adage that the business of America is business is still true,” says Curtis Chin, the former U.S. ambassador to the Asian Development Bank and now an Asian Fellow at the Milken Institute. “Soft power comes in many forms.” —With Chitra Somayaji

To contact the authors of this story:
Edward Robinson in London at edrobinson@bloomberg.net
Lananh Nguyen in New York at lnguyen35@bloomberg.net
Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editor responsible for this story:
Howard Chua-Eoan at hchuaeoan@bloomberg.net
James Hertling

BOTTOM LINE – American banks are establishing global hegemony as European institutions retrench even before London loses its place as the world’s financial capital.

The $9 Trillion Short That May Send the Dollar Even Higher

The $9 Trillion Short That May Send the Dollar Even Higher

2:15

April 13 — Bloomberg’s Tom Keene examines a chart on the euro. Langer Research’s Gary Langer also speaks on “Bloomberg Surveillance.” 

Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going.

There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen.

Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show.

In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60 percent in 2011 from 73 percent a decade earlier, though it’s since climbed back to 63 percent.

So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley.

Dollar ‘Power’

“Short-covering will continue to power the dollar higher,” said Jen, who predicts a 9 percent advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.”

Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy.

Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20 percent since the middle of 2014. The gains stalled recently, sending the index down more than 3 percent in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.

Top Forecaster

Jen isn’t the only one who thinks short-dollar positions will cause the rally to extend.

Chris Turner, head of foreign-exchange strategy at ING Groep NV, sees the dollar surging through parity with the European currency by mid-year, from $1.0586 per euro as of 12:11 p.m. in New York. He said gains will be spurred by bonds from Germany to Ireland yielding below zero.

“Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend,” said London-based Turner, whose bank topped Bloomberg’s rankings for the most accurate currency forecasts in the past two quarters.

Not everyone thinks the dollar will keep on climbing. David Bloom, global head of currency strategy at HSBC Holdings Plc, said in a report that the effects of policy divergence have run their course and that the greenback rally “will stall as the market demands: tell me something I don’t know.”

Billionaire Bill Gross of Janus Capital Group Inc. has meanwhile been betting on U.S. Treasuries against German bunds on the basis that the spread between American and European interest rates will narrow. He called his bet “the trade of the year.”

Rates ‘Dichotomy’

Adrian Lee, whose eponymous investment company oversees more than $5 billion, does expect the dollar to keep strengthening and points to monetary policy as the biggest driver as the tightening bias of the Fed contrasts with a European Central Bank that’s expanding the money supply.

“The dichotomy between Europe and the U.S. is most interesting,” said Lee, chief investment officer at Adrian Lee & Partners, which has offices in London and Dublin. “If you ask where our strategy would be in a year’s time, we can easily have a forecast of the euro well below $1.”

He also sees another structural factor that’s underpinning the dollar: the U.S.’s shrinking current-account deficit.

The decline in oil prices — even with the shale-gas revolution, the nation is still an importer — has helped the U.S. reduce its trade shortfall to 2.3 percent of gross domestic product, according to data compiled by Bloomberg. That’s down from a record 5.9 percent in 2006.

For Jen, the rise in dollar-denominated debt across the globe is key. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008 — when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency.

Repaying Debt

Russian gas producer OAO Gazprom, Spanish phone company Telefonica SA and ArcelorMittal, the world’s largest steelmaker, have each raised about $12 billion in the U.S. currency since then, data compiled by Bloomberg show. France and Sweden are among the biggest sovereign issuers, borrowing more than $100 billion between the two.

Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime.

“After years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repay” given the currency’s recent gains, Jen said. “People will either repay early or start hedging actively. There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials.”

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously

JIM ROGERS: I Warned You The Swiss Central Bank’s Currency Policy Would End Disastrously
Business Insider

Global currency markets are roiling in the aftermath of Thursday’s surprise decision by Switzerland’s central bank to end a 3-year policy that limited the franc from appreciating too much against the euro.

The move sent the franc soaring, triggering hundreds of millions of dollars of losses at banks including Barclays and Deutsche Bank, and bankrupted several currency brokers overnight. Many financial observers have lambasted the Swiss central bank for failing to signal the move was coming.

Jim Rogers, however, saw all of this coming, and he wrote about it in his 2013 book Street Smarts.

“I explained carefully and at length that it was coming and why,” he said in an email to Business Insider. “I am still astonished they would ever have done something so foolish, but politicians throughout history have always done some amazingly foolish things.”

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

Here’s the excerpt from the book:

Some of Switzerland’s most prestigious banks were established in the aftermath of the French Revolution, during the turmoil that gripped France under Napoleon. Bank people fled France and took their money over the mountains to Geneva, which was not very far away. You will see that some of the great old Swiss banks, the private banks, were founded in 1795, 1803, years like that. But by then Swiss banking traditions were already well established.

Switzerland has been an international center of finance since the end of the Renaissance. Known since then for its stability, sound economy, sound currency, and privacy in financial matters, it has long provided monetary refuge from the wealthy evading the consequences of political turmoil in Europe, from French nobility fleeing the guillotine to the Jews escaping Germany a century and a half later. It has, for the same reasons, in modern times, attracted the money of numerous despots, criminal organizations, and scoundrels.

Switzerland, traditionally, has been unconditional in its offer of bank secrecy. Of course, all banks are supposed to keep your affairs quiet. If you put your money in a bank in Chicago fifty years ago, you would have done so with the assumption that it was confidential. In America, as we have seen, that is no longer the case. The government can look into your bank account, your bedroom, your mail … anywhere it wants. And in much the way that our privacy has been taken away from us, the Swiss have recently surrendered some of theirs, succumbing to pressure from the United States. Bank secrecy in Switzerland is not as sacrosanct as it once was.

Nonetheless, the first thing people look for when seeking monetary refuge is safety. They want stability. They want the security of knowing they will get their money back, and that they will get back at least as much as they put there in the first place. That depends entirely on a sound currency. And that is something the Swiss franc has always offered. The question, now, is whether that is going to last.

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 percent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 percent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

In the first scenario, the market will continue to buy Swiss francs, which means that the Swiss National Bank will just have to keep printing and printing and printing, and that will of course debase the currency. Now, there are major exporters in Switzerland who might benefit, but the largest industry in Switzerland, the single largest business, is finance. The economy rises or falls on the nation’s ability to attract capital. And the reason people put their money there is their trust in the soundness of the currency- they not that their money will be there when they want it, and that it will not be worth significantly less than when they put it there in the first place.

But people will stop rushing to put their money into a country where the value of the currency is deliberately being driven down. After the Second World War and for the next thirty years, people took their money out of the United Kingdom because the currency plummeted. (Politicians blamed it on the gnomes of Zurich.) London ceased to be the world’s reserve financial center because Britain’s money was no good. Similarly, if you debase the franc, eventually nobody will want it. You will have eroded its value, not simply as a medium of exchange, but also a monetary refuge. The money will move to Singapore or Hong Kong, and the Swiss finance industry will wither up and disappear.

The alternative scenario is what happened in July 2010, the last time the Swiss tried to weaken their currency. They did so by buying up foreign currencies to hold against the franc-selling the franc to keep the price down. But the market just kept buying the francs, and the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort. At that point, when the bank stopped selling it, the Swiss franc rose in value, all the currencies the Swiss had bought (and were now holding) declined in value, and the country lost $21 billion. In the end, the market had more money than the bank, and market forces inevitably prevailed.

In the late 1970s when everyone was rushing to the franc, the Swiss National Bank, to stem the tide, imposed negative interest rates on foreign depositors. The government levied a tax on anybody who bought the currency. It was their form of exchange controls back then. If you bought 100 Swiss francs, you wound up with 70 in your pocket. Today, with the rush on again, The Economist has described the Swiss currency as “an innocent bystander in a world where the eurozone’s politicians have failed to sort out their sovereign-debt crisis, America’s economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen.”

All of which is true, but I think the problem runs deeper than that. The Swiss for decades had a semi monopoly on finance. And as a result they have become less and less competent. The entire economy has been overprotected. The reason Swiss Air went bankrupt is because it never really had to compete. Any monopoly eventually destroys itself, and Switzerland, in predictable fashion, is corroding from within. As a result, other financial centers have been rising: London, Lichtenstein, Vienna, Singapore, Dubai, Hong Kong.

I still have those original Swiss francs that I bought in 1970, and since then the franc is up about 400 percent. Granted, it has been over forty years, but 400 percent is nothing to sneeze at. Plus I have been collecting interest. Had I kept the money in an American savings account, it would have gone down 80 percent against the franc.

Reprinted from “Street Smarts” Copyright © 2013 by Jim Rogers. Published by Crown Business, an imprint of The Crown Publishing Group, a division Random House LLC, a Penguin Random House Company.

Deutsche Bank, Barclays Seen Losing Millions Amid Swiss Rout

Bloomberg Jan 16, 2015

Deutsche Bank AG and Barclays Plc (BARC ▼ -1.58% 224.35), two of the world’s largest currency dealers, were among the first banks to suffer losses after the Swiss central bank’s surprise decision to abandon a cap on the franc, people with knowledge of the matter said.

Deutsche Bank lost $150 million on Thursday amid an unexpected surge in the Swiss franc, said one of the people, who asked not to be identified because the figure hasn’t been made public. Barclays’s losses were less than $100 million, another person said. The losses are still being calculated, and may spread to other asset classes, including equities, one of the people said.

The Swiss National Bank’s decision to scrap the three-year-old ceiling sent the franc up as much as 41 percent versus the euro, while climbing more than 15 percent against all of the more than 150 currencies tracked by Bloomberg. Two brokers, Global Brokers NZ Ltd. and Alpari (UK) Ltd., said they were forced to shut down amid continuing market turmoil.

Barclays’s losses won’t have a material impact on results and the London-based bank is able to fulfill all spot Swiss currency trades made, said the person.

Greek euro exit would be ‘Lehman Brothers squared’: economist

WASHINGTON (MarketWatch) — A decision by a new Greek government to leave the eurozone would set off devastating turmoil in financial markets even worse than the collapse of Lehman Brothers in 2008, a leading international economist warned Saturday.

A Greek exit would likely spark runs on Greek banks and the country’s stock market and end with the imposition of severe capital controls, said Barry Eichengreen, an economic historian at the University of California at Berkeley. He spoke as part of a panel discussion on the euro crisis at the American Economic Association’s annual meeting.

The exit would also spill into other countries as investors speculate about which might be next to leave the currency union, he said.

“In the short run, it would be Lehman Brothers squared,” Eichengreen warned.

He predicted that European politicians would “swallow hard once again” and make the compromises necessary to keep Greece in the currency union.

“While holding the eurozone together will be costly and difficult and painful for the politicians, breaking it up will be even more costly and more difficult,” he said.

In general, the panel, consisting of four prominent American economists, was pessimistic about the outlook for the single-currency project.

Jeffrey Frankel, an economics professor at Harvard University, said that global investors “have piled back into” European markets over the last years as the crisis ebbed.

Now, there will likely be a repeat of the periods of market turmoil in the region and spreads between sovereign European bonds could widen sharply.

Kenneth Rogoff, a former chief economist at the International Monetary Fund and a Harvard professor, said the euro “is a historic disaster.”

“It doesn’t mean it is easy to break up,” he said.

Martin Feldstein, a longtime critic of the euro project, said all the attempts to return Europe to healthy growth have failed.

“I think there may be no way to end to euro crisis,” Feldstein said.

The options being discussed to stem the crisis, including launch of full scale quantitative easing by the European Central Bank, “are in my judgment not likely to be any more successful,” Feldstein said.

The best way to ensure the euro’s survival would be for each individual eurozone member state to enact its own tax policies to spur demand, including cutting the value-added tax for the next five years to increase consumer spending, Feldstein said.

China Offers Russia Help With Currency Swap Suggestion By Bloomberg News – Dec 22, 2014, 2:35:41 AM

Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up support for the ruble without depleting foreign-exchange reserves.

China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster.

The ruble strengthened 4.1 percent against the dollar today amid the signs of willingness by China, the world’s second-largest economy, to prop up its neighbor. Russia, the biggest energy exporter, saw its currency tumble as much as 59 percent this year as crude oil prices slumped and U.S. and European sanctions hurt the economy. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status.

“Many Chinese people still view Russia as the big brother, and the two countries are strategically important to each other,” said Jin Canrong, Associate Dean of the School of International Studies at Renmin University in Beijing, referring to the Soviet Union’s backing of Communist China in its first years. “For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

Swap Line

Russian President Vladimir Putin, left, shakes hands with his Chinese counterpart Xi Jinping, right, before their meeting at the Asia Pacific Economic Cooperation (APEC) summit in Beijing, China, on Nov. 9, 2014. Photographer: Mikhail Klimentyev/AFP/Getty Images
China and Russia signed a three-year currency-swap line of 150 billion yuan ($24 billion) in October, an agreement that can be expanded with the consent of both parties. The People’s Bank of China published a chart detailing how such an agreement works in a microblog dated Dec. 19 and the official People’s Daily newspaper said today that the explanation was provided to address concerns the nation could suffer losses if Russia used the facility to obtain funds.

“As all we pay out and receive in return are renminbi, we don’t have to bear exchange-rate risks,” the PBOC said in the microblog, using an alternative name for the yuan. The swap amount can be adjusted to allow for changing circumstances and prevailing exchange rates, rather than pre-determined, are used, it said.

China is promoting the yuan as an alternative to the dollar for global trade and finance and the PBOC has signed currency-swap agreements with 28 other central banks to encourage this. The nation’s foreign-exchange reserves of $3.89 trillion are the world’s largest and compare with Russia’s $374 billion.

“Irreplaceable Partner”

“Russia is an irreplaceable strategic partner on the international stage,” according to an editorial today in the Global Times, a Beijing-based daily affiliated with the Communist Party. “China must take a proactive attitude in helping Russia walk out of the current crisis.”

Still, “China’s help for Russia will be limited,” the editorial said. While China can offer capital, technical and market support, it can’t address Russia’s economic structure and excessive reliance on energy exports, the editorial said.

China signed a three-decade, $400 billion deal to buy Russian gas earlier this year. Oil imports from Russia hit an all-time high in November, according to China’s General Administration of Customs.

Russia isn’t in talks with China about any financial aid, said Dmitry Peskov, a spokesman for President Putin, on Dec. 20.

Argentina

Russia wouldn’t be the first country in financial strife to turn to China for support this year. Argentina’s central bank utilized a cross-currency swap with the PBOC to stem a slide in the peso, which dropped 24 percent against the greenback this year as the government defaulted on dollar bonds. The peso has weakened 0.3 percent this month following a similar decline in November.

A similar move by Russia could help stabilize the ruble, according to Jan Dehn, the London-based head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets. It would also bolster Chinese efforts to make the yuan a global reserve currency, he wrote in a Dec. 18 report.

To contact Bloomberg News staff for this story: Fion Li in Hong Kong at fli59@bloomberg.net; Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Malcolm Scott

Russia’s fast track to ruin DECEMBER 16, 2014 AT 1:26 AM BBC

Here are the numbers that explain why the Russian economy is imploding in the face of a tumbling oil price and Western sanctions.
Oil and gas energy represents two thirds of exports of around $530bn (£339bn). Without them, Russia would have a massive deficit on its trade and financial dealings with the rest of the world – which is why Russia’s central bank expects a capital outflow of well over $100bn this year and next.

And public expenditure is almost completely supported by energy-related revenues. In their absence, the government would be increasing its indebtedness by more than 10% a year, according to IMF data.

So the massive and unsustainable non-oil deficits in the public sector and trade explain why investors don’t want to touch the rouble with even the longest barge pole.
And Western sanctions, imposed to punish Putin for his Ukraine adventure, make it all the harder for Russia’s undersized non-oil economy to trade the country out of its mess.
Desperate government?

Little wonder then that the rouble has halved this year, more-or-less in line with the tumbling oil price.

That raises the spectre of rampant inflation – prices are already rising more than 9% a year on the backward-looking official measure.
And there is the twin nightmare of a fully fledged slump: Russia’s central bank expects the economy to contract not far off 5% next year.

But even so the decision of Russia’s central bank to raise its policy interest rate from 10.5% to 17% is eye-catching (ahem).
It might work to stem the rouble’s fall. Then again it could reinforce investors’ fears that the government is increasingly desperate and powerless in the face of a market tsunami.
Global ripples

Russia isn’t bust yet. In the middle of the year, it was projected by the IMF to hold reserves equivalent to about a year’s worth of imports. That will probably be down to nearer 10 months now, but provides some kind of cushion.

What does it mean for the rest of us? Well it doesn’t help that Russia is sucking demand from a global economy that is already looking a bit more ropey, as the eurozone stagnates and China slows.

As for the exposure of overseas banks – at $364bn, including guarantees – that is serious but not existentially threatening (and loans made by UK banks are just a few percentage points of that).

There are also about half a trillion dollars of Russian bonds trading, with about a third of those issued by the government. Most of those will be viewed by investors as junk, even if they are not officially classified as such by the rating agencies.

Or to pull it all together, Russia is massively leaking cash. And absent an entente with the West over Ukraine, which does not look imminent, it is challenging to see how the hole can be plugged.

Currency Markets Jolted After Months of Calm

Currency Markets Jolted After Months of Calm

Volatility Rises as Investors Focus on Interest-Rate Divergence

By ANJANI TRIVEDI and IRA IOSEBASHVILI WSJ

After months of calm, currency markets have sprung back to life, as investors scramble to take advantage of the divergent paths taken by major central banks.

Bigger and more-frequent shifts in the foreign-exchange market are a welcome relief for investors, many of whom struggled to make profitable trades when currencies weren’t moving as dramatically.

Banks, whose currency desks execute trades on behalf of clients and companies, also see revenues grow when choppier markets drive up demand for their services.

“This definitely brightens my day,” said Chris Stanton, who oversees about $200 million at California-based Sunrise Capital Partners LLC. “It’s a welcome return to what feels like a freer market.”

More Reading

The size of daily trading swings across currencies has jumped 55% since hitting its lowest in at least a decade on July 31, according to Deutsche Bank AG. During that time, the dollar climbed to a six-year high against the yen, the euro fell below $1.30 for the first time since July 2013 and the pound tumbled to a 10-month low against the dollar. On Wednesday, the Swiss franc saw its biggest drop against the euro in six months.

Driving the price swings is a shift in policies at some of the world’s largest central banks. A burgeoning recovery in the U.S. has brought the Federal Reserve closer to raising rates, a move that would make the dollar more attractive to investors. At the same time, European and Japanese central banks are still trying to kickstart their economies and relying on policies such as bond buying that tend to drive down interest rates and reduce the value of a currency.

Implied volatility, which tracks the price of options used to protect against swings in exchange rates, has surged 45% in September to an eight-month high, according to Deutsche Bank. Higher implied volatility suggests money managers are buying options in anticipation of a more-active market.

Some money managers are buying the dollar ahead of next week’s Fed meeting, where policy makers could send firmer signals on their outlook for interest rates. Mr. Stanton’s fund is betting that the dollar will continue to strengthen against the yen and emerging-market currencies as the Fed gets closer to raising interest rates.

Citigroup Inc., C +1.11% the world’s largest currencies-dealing bank, on Monday said its markets revenue, which includes currency trading, is on track to be roughly flat in the third quarter compared with the same period in 2013, ending a decline that started a year ago.

Enlarge Image

Until recently, unusually calm markets had left investors with fewer opportunities to trade and led to the demise of several large currency funds. FX Concepts LLC, founded in 1981 and considered a pioneer in currency investing, closed its doors last year after assets shriveled to $660 million from $14 billion before the financial crisis.

Currency volatility plummeted after the financial crisis, as the world’s biggest central banks cut interest rates to near zero. That gave traders little incentive to try and capture the difference in interest rates between various currencies, a key driver of activity in the foreign-exchange market.

That status quo has started to crack. Minutes from the Fed’s July meeting showed growing support for raising rates, spurring gains in the dollar when they were released in August. Earlier this month, the ECB surprised investors with a rate cut, bringing down the euro. Meantime, the pound tumbled on concerns over the repercussions from Scotland’s possible secession. On Wednesday, the Swiss National Bank said that it could introduce negative interest rates to halt the franc’s rise.

Trading bands of some major currencies have widened this summer, opening the door to bigger profits for investors. So far in September, the dollar is moving on average by 0.70 yen a day, the biggest range since February and up from 0.35 in July. Daily moves in the euro this month are averaging 0.79 U.S. cent, compared with 0.4 cent in July.

“Now, there are more opportunities to make money,” said Masafumi Takada, vice president of currency trading at BNP Paribas SA BNP.FR -0.39% in New York. Business volume at the bank’s New York currency-trading desk has quadrupled since July, Mr. Takada said.

Currency volatility can be a double-edged sword. Investors can profit by riding the dollar’s steady move higher against a variety of currencies. But a sudden reversal—such as a surge in the pound if Scotland votes against independence—could catch traders off guard. Goldman Sachs Group Inc. GS +1.39% took a loss on an options trade involving the dollar and yen about a year ago, people familiar with the matter said. Last summer, the yen’s months-long decline had stalled.

Federal Reserve Chairwoman Janet Yellen attends a Board of Governors meeting at the Federal Reserve in Washington last week. Associated Press

Some traders believe the current bout of volatility may die down. The large moves seen this week are unusual, analysts say.

On Wednesday, the euro fell 0.2% to $1.2917, while the dollar rose 0.6% against the yen to 106.85. The pound rebounded, with the dollar falling 0.64% against the British currency.

“The question is whether or not this much of a jump [in volatility] is sensible,” said Geoff Kendrick, head of foreign-exchange and rates strategy in Asia at Morgan Stanley MS +1.24% in Hong Kong.

Still, many find it hard to imagine that the magnitude of the Fed’s policy shift won’t continue sending waves across currency markets.

“The dollar’s on a tear, and there is more of this to come,” said Kit Juckes, a strategist at Société Générale SA.

—Justin Baer and Saabira Chaudhuri contributed to this article.

Write to Anjani Trivedi at anjani.trivedi@wsj.com and Ira Iosebashvili at ira.iosebashvili@wsj.com

A Global Boom Is Facing the End of Easy Lending

New York Times

August 20, 2013

A Global Boom Is Facing the End of Easy Lending

By LANDON THOMAS Jr.

In a city where skyscrapers sprout like weeds, none grew as high as the Sapphire tower in Istanbul.

Today, it stands as a symbol of how far the mighty may fall.

Like a vast majority of new buildings that have blanketed the Istanbul hills in recent years, the Sapphire — at 856 feet it is the tallest in Turkey and among the loftiest in Europe — was built on the back of cheap loans, in dollars, that have flooded Turkey and other fast-growing markets like Brazil, India and South Korea. The money began to flow when the Federal Reserve and other major central banks cut interest rates to the bone in 2009 and cranked up the printing presses in a bid to spur recovery in the United States and other advanced industrial nations.

But now, with expectations mounting that the Federal Reserve, led by its departing chairman Ben S. Bernanke, may soon begin to tighten its monetary spigot, Istanbul’s skyline could well be a harbinger of an emerging-market bust brought on by unpaid loans, weakening currencies, and, eventually, the possible failure of developers and banks.

This week, stocks and currencies in several developing Asian markets, including India, Indonesia and Thailand, have been hit hard. Global investors continued to withdraw funds from emerging markets, as interest rates edge up in anticipation of the Fed’s move to reduce its stimulus efforts in the United States. Indonesia’s benchmark index, which fell 5 percent on Monday, dropped 3.2 percent more on Tuesday. India’s stock market fell 0.3 percent after sliding 5.6 percent in the previous two trading sessions.

Some analysts see it as the markets reacting to an end — real or perceived — of the Bernanke boom. “What we are witnessing is a huge bubble, a Bernanke bubble if you will,” said Tim Lee of Pi Economics, an independent consultancy based in Greenwich, Conn.

Not everybody is as alarmed as Mr. Lee. Still, 16 years after emerging markets in Asia imploded after local currencies collapsed, even optimists are starting to grow nervous over the rapid accumulation of dollar-denominated debt not just in Turkey but in other now-struggling economies like Brazil, India and South Korea.

As it turned out, some of the biggest beneficiaries of the Fed’s largess were not so much in the developed world, but among the politically connected elite in emerging nations like Turkey, where vanity towers, glitzy shopping malls and even grander projects to come — a third bridge across the Bosporus and a vast new airport — have become representative of the nation’s new dynamism, economic as well as geopolitical.

What these elites have so far ignored, Mr. Lee warns, is that their obligations carry with them a significant and pressing danger: currency risk.

Unlike the risky loans made to subprime borrowers in the United States or Irish real estate developers in the euro zone, dollar debts taken on by companies erecting skyscrapers in Istanbul, manufacturing steel in India and prospecting for oil in Brazil, need to be largely paid back in dollars by entities that earn most of their revenues in their home currency.

When the Turkish lira or the rupee in India was strong — as these currencies were until recently — local companies had every incentive to borrow in dollars at comparatively lower interest rates.

But when local currencies start to weaken, in line with diminished economic prospects, then the effect is twofold: paying off dollar loans becomes more costly for the borrower, and the lender becomes increasingly skittish about his exposure to a fragile currency and may move to reduce or even slash credit lines.

While Brazil has the largest amount of dollar loans outstanding at $287 billion, few countries have relied on this source of money as much as Turkey, where dollar loans of around $172 billion represent 22 percent of the overall economy.

In recent months, the Turkish lira has lost 4.5 percent of its value against the dollar. Adding to this, protests have hit Istanbul’s main public square over an unpopular building sponsored by a developer with close political and cultural ties to the prime minister, Recep Tayyip Erdogan.

Goldman Sachs is forecasting a dollar-lira rate of 2.2, representing a 15 percent mini-devaluation from the current level of 1.95. “The Turkish economic miracle was built on liquidity and a massive appreciation of the Turkish lira,” said Atilla Yesilada, an economist at Global Source partners in Istanbul, who has lived through Turkey’s previous financial crashes in 1994 and 2001.

These loans — many of them relatively short term — also highlight a recurring characteristic of the emerging-market growth boom: the powerful nexus between ambitious governments eager to promote high-profile investments and politically connected business groups ready to take on such projects.

The Sapphire tower in Turkey is a perfect example in this regard.

The 54-floor tower, which received a ceremonial baptism from Prime Minister Erdogan when it opened in early 2011, is the signature property of the Kiler Group, one of the many construction-themed conglomerates that have achieved extraordinary success since Mr. Erdogan came to power in 2003. Like Mr. Erdogan, whose family comes from the northern Black Sea region, these businessmen hail from Turkey’s conservative Islamist provinces.

According to regulatory filings, 154 million liras of the group’s total 164 million liras in debt is denominated in dollars — about $79 million using current exchange rates. Of that figure, $25 million is related to the Sapphire tower, company officials say. Most of the group’s debt is short term, and in a reflection of the project’s risk, regulatory documents show that the cash generated by the property goes directly to the project’s primary creditor, Akbank, the fourth-largest bank in Turkey.

Given the differential between dollar loans at 6.5 percent and lira credit costing 11.5 percent, it was no surprise that the Kiler Group and others chose to borrow in dollars. The company, in its most recent filings, acknowledged this risk: if the American dollar gains 10 percent against the Turkish currency, the loss to the company would be 11.8 million Turkish liras.

According to Rasim Kaan Aytogu, chief financial officer for the Kiler Group, the Sapphire tower’s share of that total is $25 million. He contends that because the project books its revenue in dollars it is not exposed to currency fluctuations. He also says that demand for apartment units is strong, with 66 percent of them sold.

“This is a unique property in all of Europe,” he said. “And it is becoming a travel destination.”

But Turkish real estate experts say that sales of the apartments, which cost from $1 million to $10 million, have lagged and that the tower does not have the prestige of rival properties, including towers built by Trump and Zorlu. And according to company filings, revenue from visitors ogling the view from the tower’s observation deck have undershot targets from the outset.

The Kilers are not alone in their ability to make a big splash in Istanbul by deploying dollar debt and political muscle.

Even more influential has been the Kalyon Group, another real estate conglomerate with close ties to Mr. Erdogan. Kalyon is the main developer behind Mr. Erdogan’s controversial effort to build a replica of Ottoman-era army barracks as a shopping mall near Taksim Square.

As troubles were beginning to brew in Turkey, the leader of the Kalyon Group, Cemal Kalyoncu, remained confident that nothing would change. Asked in an interview with a local paper how the consortium of companies that won the tender for the airport would obtain the money, Mr. Kalyoncu said the group would look for loans outside Turkey.

“Financing this should be no problem at all,” he said.