Kondratieff Winter Gets Underway As BoJ Currency Traders Go Short Once Popular Carry Trades
Saturday, 1. November 2008, 18:09:03
Economic expansion collapses as credit dries up
Ben Holland, Laura Cochrane and Balazs Penz in Bloomberg article Panic Strikes East Europe Borrowers as Banks Cut Franc Loans report that Imre Apostagi says the hospital upgrade he's overseeing has stalled because his employer in Budapest Hungary can't get a foreign currency loan.
The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe's developing markets and local currencies plunge.
``There's no money out there,'' said Apostagi, a project manager who asked that the medical-equipment seller he works for not be identified to avoid alarming international backers. ``We won't collapse, but everything's slowing to a crawl. The whole world is scared and everyone's going a bit mad.''
Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe's fastest-growing economies.
``What has been a factor of strength in recent years has now become a social weakness,'' said Tom Fallon, emerging-markets head in Paris at La Francaise des Placements, which manages $11 billion.
German and Austrian banks curtail emerging europe lending
Now banks including Munich-based Bayerische Landesbank and Austria's Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.
The east has been the fastest-growing part of Europe, with Romania's economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.
Governments are seeking to ease the pain as recession concerns sweep across eastern Europe's emerging markets.
Former soviet union countries seek emergency assistance funding from IMF to stay liquid
Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.
Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.
Governments are forced by the IMF to raise interest rates as their currencies are sold short by Bank of Japan 0.5% financed currency traders
The Hungarian central bank raised its benchmark interest rate by 3 percentage points to 11.5 percent on October 22, 2008 to defend the forint.
The same day, Prime Minister Ferenc Gyurcsany said the government was seeking an accord with banks to ``prevent the burdens of debtors from reaching the sky.'' It's considering granting borrowers extended payment periods or the ability to convert foreign-exchange debts into forint.
``Panicked customers are calling to say they're afraid the interest on their mortgages will go up or that they won't be able to secure mortgages,'' said Nikolett Gurubi, director of lending at Otthon Centrum Belvaros, the downtown Budapest branch of a real estate agency.
Project manager Apostagi, 58, said he hopes the crisis will be over in a few months, blaming U.S. banks for creating such distrust between lenders. For now, ``it looks like our signed contracts were for naught,'' he said.
Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was ``excessively high and risky,'' especially because Romanians with their communist past aren't used to the discipline of debt.
``It's not that we're bad,'' Isarescu said. ``It's that, culturally, we need to prepare for the moment of repayment.''
At the other end of the spectrum, Turkish consumers have proved more cautious after living through their own currency crises in 2001 and 1994. The government, the IMF's biggest customer in recent years, is resisting new loans from the fund, arguing that its economy can weather the credit crunch and a 22 percent slump in the lira since the start of September.
The unwinding yen carry trade is "The Aramageddon Trade" for the devastation it produces.
Sebastian Becker in DB Research article The Yen Strikes Back For Now - The Unwinding Of JPY Funded Carry Trades writes about the great unwind in the Yen Carry Trade stating: "Carry trade activities built up over the past few years are now being suddenly unwound, thereby giving rear cover to the yen. Although global carry trade activities are difficult to track and the total size is even more demanding to estimate, empirical evidence suggests that JPY funded carry trades have been clearly cut back since the onset of the credit crisis. For instance, Japanese balance-of-payments data indicates that net loan outflows from Japan to the rest of the world have softened since mid-2007. Moreover, non-commercial JPY future positions have been abruptly reversed from net short to net long since July 2007, according to the US Commodity Futures Trading Commission. Furthermore, the amount and percentage share of foreign banks’ borrowing in Japanese money call markets has decreased considerably for more than a year now. Another indicator for carry trades – the amount of foreign assets held by Japanese households – speaks the same language. While the stock of foreign assets skyrocketed over the past few years to a peak of JPY 38 tr in October 2007, it has shrunk since then to below JPY 30 tr (to roughly USD 300 bn) in September 2008. However, it is not clear to what extent this reduction is due to yen appreciation and how much it is driven by net foreign asset selling. Last but not least, another gauge for carry trades is the net foreign claims of BIS reporting Japanese banks to offshore centres where many hedge funds are reported to have their offices. According to this gauge, yen carry trades could have been as large as more than USD 400 bn in Q2 2008 (see chart). Overall, empirical evidence points to an unwinding of yen carry trades.
To sum up, given heightened global risk aversion, the plunge in global asset prices and a reduced interest-rate disadvantage between major economies and Japan, the JPY may trade sideways or even appreciate further over the short to medium term against the USD and EUR even after its recent rally. Although the BoJ trimmed its benchmark rate to 0.3% from an already low 0.5%, the JPY’s interest rate disadvantage should nevertheless shrink further as other major central banks have still more room for monetary easing over the next couple of months."
Amicus provides the monthly chart of the EUR/JPY; it's the chart of the century, as it shows the Armageddon Trade unwinding ... Monthly EURJPY
Yahoo Finance chart shows the end of the age of prosperity and the beginning of the dark era of economic collapse and financial ruin
The Yahoo Finance chart of EWO GUR HYG SPY and FXY shows the rise and fall of carry trade debt facilitated growth that came under the laissez faire, neoliberal, Milton Friedman, capitalism which was based on a floating rate currency exchange, interest rate differential investing, and free trade system ... ewo, gur, hyg, spy, fxy
Ben Holland, Laura Cochrane and Balazs Penz in Bloomberg article Panic Strikes East Europe Borrowers as Banks Cut Franc Loans report that Imre Apostagi says the hospital upgrade he's overseeing has stalled because his employer in Budapest Hungary can't get a foreign currency loan.
The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe's developing markets and local currencies plunge.
``There's no money out there,'' said Apostagi, a project manager who asked that the medical-equipment seller he works for not be identified to avoid alarming international backers. ``We won't collapse, but everything's slowing to a crawl. The whole world is scared and everyone's going a bit mad.''
Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe's fastest-growing economies.
``What has been a factor of strength in recent years has now become a social weakness,'' said Tom Fallon, emerging-markets head in Paris at La Francaise des Placements, which manages $11 billion.
German and Austrian banks curtail emerging europe lending
Now banks including Munich-based Bayerische Landesbank and Austria's Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.
The east has been the fastest-growing part of Europe, with Romania's economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.
Governments are seeking to ease the pain as recession concerns sweep across eastern Europe's emerging markets.
Former soviet union countries seek emergency assistance funding from IMF to stay liquid
Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.
Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.
Governments are forced by the IMF to raise interest rates as their currencies are sold short by Bank of Japan 0.5% financed currency traders
The Hungarian central bank raised its benchmark interest rate by 3 percentage points to 11.5 percent on October 22, 2008 to defend the forint.
The same day, Prime Minister Ferenc Gyurcsany said the government was seeking an accord with banks to ``prevent the burdens of debtors from reaching the sky.'' It's considering granting borrowers extended payment periods or the ability to convert foreign-exchange debts into forint.
``Panicked customers are calling to say they're afraid the interest on their mortgages will go up or that they won't be able to secure mortgages,'' said Nikolett Gurubi, director of lending at Otthon Centrum Belvaros, the downtown Budapest branch of a real estate agency.
Project manager Apostagi, 58, said he hopes the crisis will be over in a few months, blaming U.S. banks for creating such distrust between lenders. For now, ``it looks like our signed contracts were for naught,'' he said.
Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was ``excessively high and risky,'' especially because Romanians with their communist past aren't used to the discipline of debt.
``It's not that we're bad,'' Isarescu said. ``It's that, culturally, we need to prepare for the moment of repayment.''
At the other end of the spectrum, Turkish consumers have proved more cautious after living through their own currency crises in 2001 and 1994. The government, the IMF's biggest customer in recent years, is resisting new loans from the fund, arguing that its economy can weather the credit crunch and a 22 percent slump in the lira since the start of September.
The unwinding yen carry trade is "The Aramageddon Trade" for the devastation it produces.
Sebastian Becker in DB Research article The Yen Strikes Back For Now - The Unwinding Of JPY Funded Carry Trades writes about the great unwind in the Yen Carry Trade stating: "Carry trade activities built up over the past few years are now being suddenly unwound, thereby giving rear cover to the yen. Although global carry trade activities are difficult to track and the total size is even more demanding to estimate, empirical evidence suggests that JPY funded carry trades have been clearly cut back since the onset of the credit crisis. For instance, Japanese balance-of-payments data indicates that net loan outflows from Japan to the rest of the world have softened since mid-2007. Moreover, non-commercial JPY future positions have been abruptly reversed from net short to net long since July 2007, according to the US Commodity Futures Trading Commission. Furthermore, the amount and percentage share of foreign banks’ borrowing in Japanese money call markets has decreased considerably for more than a year now. Another indicator for carry trades – the amount of foreign assets held by Japanese households – speaks the same language. While the stock of foreign assets skyrocketed over the past few years to a peak of JPY 38 tr in October 2007, it has shrunk since then to below JPY 30 tr (to roughly USD 300 bn) in September 2008. However, it is not clear to what extent this reduction is due to yen appreciation and how much it is driven by net foreign asset selling. Last but not least, another gauge for carry trades is the net foreign claims of BIS reporting Japanese banks to offshore centres where many hedge funds are reported to have their offices. According to this gauge, yen carry trades could have been as large as more than USD 400 bn in Q2 2008 (see chart). Overall, empirical evidence points to an unwinding of yen carry trades.
To sum up, given heightened global risk aversion, the plunge in global asset prices and a reduced interest-rate disadvantage between major economies and Japan, the JPY may trade sideways or even appreciate further over the short to medium term against the USD and EUR even after its recent rally. Although the BoJ trimmed its benchmark rate to 0.3% from an already low 0.5%, the JPY’s interest rate disadvantage should nevertheless shrink further as other major central banks have still more room for monetary easing over the next couple of months."
Amicus provides the monthly chart of the EUR/JPY; it's the chart of the century, as it shows the Armageddon Trade unwinding ... Monthly EURJPY
Yahoo Finance chart shows the end of the age of prosperity and the beginning of the dark era of economic collapse and financial ruin
The Yahoo Finance chart of EWO GUR HYG SPY and FXY shows the rise and fall of carry trade debt facilitated growth that came under the laissez faire, neoliberal, Milton Friedman, capitalism which was based on a floating rate currency exchange, interest rate differential investing, and free trade system ... ewo, gur, hyg, spy, fxy
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