Europe needs a weak currency
Europe needs a weak currency
And this time the difficulty isn’t so much being driven by the troubles in Greece, Spain and elsewhere but is reflecting a stark underlying weakness which will complicate already thorny structural problems. Recent data on bank lending — still central to the European economy — shows an old-fashioned, flat-out recession deepening, with banks and borrowers both backing away from credit as quickly as their little legs will carry them.
The situation cries out for action to weaken the euro from the European Central Bank, which is widely expected to do exactly nothing at its policy meeting tomorrow. Perhaps the only good news is that the markets, recognizing the issues, are trading the value of the euro lower, making some slight difference in competitiveness and external demand.
Data released recently shows euro zone manufacturing shrinking for the 16th month in a row, but the real horror show recently was in an ECB survey of bank loan officers. Compared to the second quarter, loan conditions were 15 percent tighter in July-August, with banks charging more, demanding more collateral and being especially tough on riskier loans.
While banks mostly blamed the dismal outlook for their signal unwillingness to lend, lending conditions were also made worse by how expensive bank capital has become. Few want to commit capital to banks, but bank regulators are demanding more capital. This is probably wise, but the upshot is a real credit crunch. And the outlook, bankers say, is for more of the same between now and the end of the year.
We are probably hearing less about this than we otherwise would because companies themselves are not keen to borrow, seeing less profit in making new investment and being wary of extending themselves going into what may be a multi-year recession. A separate survey of small and medium-sized companies showed they are finding it increasingly difficult to get loans, with 18 percent calling access to financing their main problem.
Compared to the year before, the amount of loans made to the private sector in September shrank by 1.3 percent, with loans to corporations shrinking at double the rate in that month compared to August.
It is hard to overstate just how bad these numbers are. The euro zone economy relies heavily on bank loans, but its banking system is both unwilling and largely unable to provide finance.
Even if financing were cheap and easy, businesses have little motivation to take it up.
In pledging in late July to provide whatever was needed to support the euro, ECB chief Mario Draghi vastly reduced the risk of break-up, but didn’t do enough, in reality, to improve conditions on the ground. In actuality, Draghi’s pledge helped to underwrite a sharp rise in the value of the euro, the last thing the economy of the currency zone needs. Even after recent falls, the euro is still about 6.5 percent stronger against the dollar than its July lows. Further falls would be welcome, but the ECB may prove reluctant to jawbone its currency lower, fearing that it looks weak and overly pliant in the process.
The problem for the ECB is that, having stepped rather far out on a limb in supporting the euro project, it could easily find itself waiting too long for institutional solutions to fast-moving economic deterioration. Just this week we will have two key votes in Greece on austerity measures, and it is already manifest that Greece will need some combination of extra time, money and reduced debt. At the same time, the central bank faces questions, most recently raised in German media, over how rigorously it is applying its own rules over collateral presented to it by Spanish banks for loans. All of this may make it difficult for the ECB to feel it can safely take extra steps to support growth.
Almost throughout the crisis the ECB has erred in being too hawkish, fighting the phantom of inflation while structural and debt problems sent waves of deflation through the euro zone economy and out into the world. And to be sure, on the currency front the ECB’s job has been made more difficult by the fact that both the Federal Reserve and Bank of Japan have moved in recent months to expand or extend bond-buying programs.
If the ECB takes this Thursday’s press conference as an opportunity to spell out when and how it will implement its new bond purchase program, a perverse impact could actually be to drive the euro higher even while it lowers financing costs for euro zone sovereigns.
Getting real-world interest rates to fall, improving the transmission of monetary policy, may not be enough. The ECB needs to heat up its side of the global currency war.
— James Saft is a Reuters columnist. The opinions expressed are his own.
Gulf companies challenged by debt and rising interest rates
- Debt restructurings on the rise, but below crisis levels
- Central Bank of the UAE has raised interest rates four times since last March
There has been an uptick in recent months in heavily-borrowed companies in the Gulf seeking to restructure their debts with lenders. Although the pressure on companies is not comparable to levels witnessed in the region following the 2008 global financial crisis, rising interest rates will eventually begin to have a greater impact, say experts.
Speaking exclusively to Arab news, Matthew Wilde, a partner at consultancy PwC in Dubai, said: “We do expect that interest rate increases will gradually start to impact companies over the next 12 months, but to date the impact of hedging and the runoff of older fixed rate deals has meant the impact is fairly muted so far.”
The Central Bank of the UAE has raised interest rates four times since the start of last year, in line with action taken by the US Federal Reserve. The Fed has signalled that it will raise interest rates at least twice more before the end of the year.
Wilde added that there had been a little more pressure on company balance sheets of late, although “this shouldn’t be overplayed”.
Nevertheless, just last week, Stanford Marine Group — majority owned by a fund managed by private equity firm Abraaj Group — was reported by the New York Times to be in talks with banks to restructure a $325 million Islamic loan. The newspaper cited a Reuters report that relied on “banking sources”.
The Dubai-based oil and gas services firm, which has struggled as a result of the downturn in the hydrocarbons market since 2014, has reportedly asked banks to consider extending the maturity of its debt and restructuring repayments, after it breached certain loan covenants.
A fund managed by Abraaj owns 51 percent of Stanford Marine, with the remaining stake held by Abu Dhabi-based investment firm Waha Capital. Abraaj declined to comment.
Dubai-based theme parks operator DXB Entertainments struck a deal last month with creditors to restructure 4.2 billion dirhams ($1.1 billion) of borrowings, with visitor numbers to attractions such as Legoland Dubai and Bollywood Parks Dubai struggling to meet visitor targets.
Earlier this month, Reuters reported that Sharjah-based Gulf General Investment Company was in talks with banks to restructure loan and credit facilities after defaulting on a payment linked to 2.1 billion dirhams of debt at the end of last year.
Dubai International Capital, according to a Bloomberg report from December, has restructured its debt for the second time, reaching an agreement with banks to roll over a loan of about $1 billion. At the height of the emirate’s boom years, DIC amassed assets worth about $13 billion, including the owner of London’s Madame Tussauds waxworks museum, as well as stakes in Sony and Daimler. The firm was later forced to sell most of these assets and reschedule $2.5 billion of debt after the global financial crisis.
Wilde told Arab News: “We have seen an increasing number of listed companies restructuring or planning to restructure their capital recently — including using tools such as capital reductions and raising capital by using quasi equity instruments such as perpetual bonds.”
This has happened across the region and PwC expected this to accelerate a little as companies “respond to legislative pressures and become more familiar with the options available to fix their problems,” said Wilde.
He added that the trend was being driven by oil prices remaining below historical highs, soft economic conditions, and continued caution in the UAE’s banking sector.
On the debt restructuring side, Wilde said there had been a “reasonably steady flow of cases of debts being restructured”.
However, the volume of firms seeking to renegotiate debt remains small compared to the level of restructurings witnessed in the aftermath of Dubai’s debt crisis.
Several big name firms in the emirate were caught out by the onset of the global financial crisis, which saw the emirate’s booming economy and real estate market go into reverse.
State-owned conglomerate Dubai World, whose companies included real-estate firm Nakheel and ports operator DP World, stunned global markets in November 2009 when it asked creditors for a six-month standstill on its obligations. Dubai World restructured around $25 billion of debt in 2011, followed by a $15 billion restructuring deal in 2015.
“We would not expect it to become (comparable to 2008-9) so barring some form of sharp external impetus such as global political instability or a protectionist trade war,” said Wilde.
Nor did he see the introduction of VAT as particularly driving this trend, but rather as just one more factor impacting some already strained sectors (e.g. some sub sectors of retail) “which were already pressured by other macro factors.”