Ratings Agencies take Aim at Large Banks

Late yesterday the Moody’s Ratings agency announced that it was considering a downgrade of a number of Euro-zone, US and Canadian banks including Canada’s largest and arguably its most venerable banking institution, the Royal Bank of Canada (RBC). Readers might recall that Moody’s stripped the RBC of its Aaa rating in December 2010.

At the time this was not much of a surprise because the bank had been placed on negative credit watch earlier in that year largely due to an announcement by the RBC that it was seeking to generate a larger share of its total bottom line from Capital Markets businesses. The downgrade also occurred despite RBC having emerged from the Global Financial Crisis (GFC) relatively unscathed and in much better shape than most of its offshore competitors. Other agencies soon followed suit with their own downgrades for the bank.

The RBC is currently rated AA- by S&P and Aa1 by Moody’s. Fitch, and DBRS the other major agency and Canada’s domestic credit watchdog respectively, both peg the RBC credit quality at AA. Thus while the latest Moody’s announcement will bring their ratings assessment into line with their major competitor, it still remains above the credit assessment given by the two smaller agencies

The recent ratings action again pays reference to that fact that RBC’s announced business plans are running into strong headwinds, not in the least due to the furor over implementation of the Volcker rule, but also because the markets that it is seeking to exploit in the search for revenues are running into difficulties in the form of widening spreads, lower volumes, poor funding conditions and deteriorating investor appetite.

Other Banks under review for possible downgrades include Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley; and Moody’s said it is  extending its reviews on whether to lower ratings on Credit Suisse, Macquarie, Nomura, UBS, Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC, Royal Bank of Scotland and Societe Generale. Moody’s also extended ongoing reviews for downgrades on 11 companies.

Pointing to regulatory, balance sheet and liquidity the agency said in a statement after markets closed last night: “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms”.

The Moody’s news came hard on the heels of credit downgrades for a number of Euro-zone countries including Italy, Portugal and Spain because of uncertainty over the weakening profile of economic activity in Europe and a growing credibility gap regarding the advisability of the polices being forced on debtor countries by the EU/ECB/IMF “Troika”.

Do these Announcements now make the World now “Safer” from Financial Calamity?

Nothing could be further from the Truth.

In our opinion here at Recovery Partners, this latest wheeze from the Ratings Agencies is comparable to the fevered activity of Balinese pool boys trying to rearrange deck chairs in the middle of a force-5 Typhoon.

While EU leaders have droned on for the last several years about their intentions of putting a “firewall” around the banks and nations most afflicted by the euro zone debt crisis, nothing of the sort has occurred. In fact, the recent Long Term Refinancing Operation (“LTRO”) in Europe and ongoing easements in collateral rules make a massive outbreak of contagion more likely rather than less likely because, systemic risk is increasingly becoming a function of the credit quality of the weakest banks, rather than the strongest banks. The ratings agencies’ recent focus on the stronger banks such as the RBC only serve to underscore the  point that these announcements are largely a sideshow.

As we know, mark-to-market rules have either been overtly suppressed by regulators in Europe and North America or ignored.

In fact, given the unrelenting stresses in the interbank markets in Europe and elsewhere, we are wondering whether or not we are close to an explicit “event of diktat” similar to what was recently announced by the Chinese authorities. Not widely publicized, a particular example of how bad things are is given by China, the authorities there have recently commanded the banks to roll over maturing loans to local authorities in full knowledge that they are non-performing and cannot be, and will not be, paid back even under the rosiest of scenarios because they are backed by asset positions that are largely worthless and non-income producing. In the wake of the GFC, Chinese Banks lent the equivalent of 25% of Chinese GDP to local authorities. This is not a small problem.

Having the central government tell the Chinese banks to represent (to the regulator controlled by it no less!)  that the loans are sound will not make them pay off nor reduce the eventual chop that the banks will have to take. This subterfuge only postpones the inevitable day of reckoning and contributes to further uncertainty.

A notch or two on RBC’s rating or on the ratings of similar banks is hardly an issue that anyone  should lose sleep over in the current environment. There are much, much bigger demons out there.

Posted in Bank Loans, Banks, Canada, Crisis, EU, Regulatory, Sovereign Debt, USA | No Comments »

FATCA : The Empire Strikes Back

In this blog our friends at US Tax outline a key development in US tax policy as it affects US expatriates. Passed as a “stealth” component of the Hiring Incentives to Restore Employment Act of 2010 (”HIRE”), the Treasury and IRS hope to significantly increase expat tax payments and compliance rates. As Dr Thomas Walford and his colleagues Darlene Hart and Alan Cohen argue in this short note, there is substantial room to increase compliance rates and collections from the almost 7 million US citizens that live outside its borders…..Alex Jurshevski

What is happening?

Just over a year ago, we realized the impact that the new Foreign Account Tax Compliance Act (”FATCA”) legislation in the US  would have on the international community.   This requires all banks, finance houses, investment managers, insurance and trust companies to either:

1. send reports each year to the US IRS on those clients who are, or who have rights to, American Citizenship or are Green Card holders, or
2. suffer a 30% withholding tax on all income, dividends on any US Assets including US Dollars and the gross proceeds of sale of any US investment (equity or bonds).

To opt for the first, the financial institution needs to sign an agreement with the US Government which covers the reporting requirements and obligations necessary.

Why did the US do this?

After 2008/9 the US was left with a substantial deficit following the bail out of the banks and Insurance companies after the Lehman collapse and the sub-prime mortgage disaster.

In 2009, the IRS reported to Congress on the position of Non-resident Americans and their tax affairs.  Currently they are aware of 7,000,000 Americans who live outside the US, and each one needs and always has needed to complete a US tax return every year.  The US taxes on the basis of citizenship or residency.  In 2009 they received only 462,000 tax returns, a figure which represents only seven per cent of the total.  As a result we know that 93% of non-resident Americans are not tax compliant.

So why is it important?

The US taxes its people on Citizenship or Residency.  As a result anyone who has American citizenship (and income over $10,000pa) has to complete a US tax return each year and pay any tax that may be owing. 

If you are an US person, not completing a US Tax return is a criminal offence.

If the individual also lives in a country which has a Double Taxation Treaty with the US, then they can obtain a credit for the tax they have paid and only pay any premium over that amount to the US Government. As a result an employed person with no assets probably owes little in tax as income tax rates are higher in many countries than in the US.  However there are frequently situations where there are US taxes owing.

Is that all that is required?

No.  There are also penalties for anyone who has not completed a tax return form and submitted it within the correct timeframe.  These can amount to a substantial sum of money.  Up until 2009 it was rare for the US to assess penalties – but now in the new economic climate it has become quite regular.

Most non-resident Americans will operate a bank account in the country in which they live; probably more than one.  As part of the annual returns to the US Government American Non Resident individuals need to submit a Foreign Bank Account Form (FBAR).  If this is not submitted there is a minimum penalty of $10,000 per account per year that it has been missed.  If the US can show that the omission was deliberate or willful then the fine rises to $100,000 per account per year or 50% of the maximum balance.

These fines can amount to an extremely large sum.

So who does this apply to?

Anybody who has US Citizenship, a right to US Citizenship or Green Card Holders.  This means that it will include all people who:

• Were born in the US
• Have taken up American Citizenship
• Green Card Holders
• Anyone who has one parent who is American and lived in America for 5 years after the age of 14.

It does not matter if you have dual citizenship or live in another country.

Why is it important to Canada?

Canada has the largest proportion of Americans in the population compared with any other country in the world.

Analysis of number of Non-Resident Americans

                               
Population Stats from http://en.wikipedia.org/wiki/List_of_countries_by_population

Number of Americans from National Taxpayer Advocate 2009 Annual Report to Congress

Is there any way out?

Yes – the US Government has announced a voluntary disclosure Initiative (OVDI). This allows people to come forward who may not be in compliance and, if accepted, pay a fine and with immunity from criminal prosecution.  The fine is calculated as 25% of assets and they need to pay the back tax owed over the last 8 years.  Under certain circumstances the fine can be reduced to 5% for non -resident Americans who are Tax compliant in the country in which they live.

This scheme is only open until 31^st August 2011.  There is a 90 day extension if necessary and once accepted into the scheme, to complete all the tax returns required.

Any one who comes through the OVDI will be fully up-to-date with their tax responsibilities and hopefully will have an easy job in finding financial institutions to represent them.

What has changed?

The tax obligations of US persons has not changed.  What has changed is that the US Government may now receive a report of all US persons who are clients starting on 1^st January 2013 from any financial institution which opts to avoid the 30% withholding tax.  Most financial institutions are expected to do so.

What should US persons do?

They need to get their tax affairs up to date urgently.  Otherwise they risk being a named as a criminal and subjected to possible arrest and detention.

Who can help?

US Tax and Financial has an office in Tel Aviv and provides tax advice and consultancy services to individuals, companies and trusts as well as financial institutions.

US Tax has offices in London, Zurich Geneva and Tel Aviv and as such can help with a wide range of issues.

Please consult

Dr Thomas Walford

Telephone +44 20 7357 8220 or Cell +44 7769 707020

t.walford@ustaxonline.com

www.ustaxonline.com

 

Posted in Economy, Regulatory, USA | No Comments »

Eyes Only!!! – President’s Report ahead of the G20 – IMF Financial Sector Stability Assessment

  

     

1^st April 2011

His Excellency
Mr. Xie Xuren
Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, DC 20431

Dear Mr. Xie;

Using this opportunity I would like to express my gratitude to the International Monetary Fund (IMF) for its continued support of the United States’ economic reforms, including the ongoing IMF-sponsored Staff Monitored Program (SMP). We are currently taking the necessary measures to address the problems associated with the episode of misreporting and risk management failure that was exposed in 2007, and to remove the institutional weaknesses that led to it. The field work for the special audit of the Federal Reserve Board has been completed and the draft report was made available to Dr Gideon Gono, the Special Advisor to the Federal Reserve Board System, in late December. We also made three repayments to the IMF, and expect to make the remaining sixty-nine payments as scheduled.

It is heartening that macroeconomic developments through end-September of last year were positive, despite recent difficulties which include the domestic civil disobedience and disorder that occurred in the aftermath of the recent re-basing of the US Dollar to the US Peseta standard; the unfortunate nuclear incident in the Middle East and the subsequent repatriation of US military personnel and forfeiture of materiel from every offshore base and operational area outside of the Continental USA (see below for revisions to National boundaries), and the significant escalation in the prices of imported electricity and fossil fuels imposed by Hydro Quebec, Ontario Power Generation and certain other energy companies in Canada.

Economic growth was stronger than envisaged under the SMP. This was partly driven by a surge in overseas remittances from US migrant workers, which allowed the Treasury to accumulate net international reserves faster than programmed. We were able to achieve an overall fiscal deficit (excluding the externally financed Public Private Investment Program, PPIP), of 7.0 % of GDP, slightly lower than targeted, largely because of buoyant revenues. At the same time, concessional loan disbursements under the PPIP at end-year were faster than anticipated, though all disbursements were made under existing loan agreements and do not constitute additional borrowing under the definitions agreed with Fund Staff. As a result of these disbursements, we now project a higher amount of concessional external borrowing at end-December than programmed. In this context, the Congress, on October 28, 2010, approved a three year debt management strategy that sets a debt ceiling of 180 percent of GDP. We also tendered the audit of the state-owned car company GM/Chrysler and the state-owned electricity company AIG/Con Edison, and issued legislation establishing a supervision unit in the Department of the Treasury for regular monitoring of the financial operations of the 500 largest state-owned enterprises.

We are confident that we will achieve our SMP policy objectives for end-December 2012. In this context, we remain committed to the policies and targets I set out in my letter to you dated June 15, 2010.

It is of note that the external environment will continue to weigh on the United States’ macroeconomic outlook in 2011. The ongoing global slowdown, in particular in China, Europe and Japan will continue to dampen demand for US export goods and weigh on consumer sentiment. However, given significantly reduced direct linkages to global financial markets, we do not foresee any meaningful direct impact on The United States’ financial sector. All in all, we still aim to sustain the same growth level as in 2010, around 0.0% (measured gross of land and natural endowment sales and certain adjustments to our national borders – see below).

Social Benefit and National Security spending will be helped by the secession of Alaska, Oregon, Washington, Montana, North Dakota, and Upper New York State to join the Dominion of Canada and the re-districting of the southernmost 200 miles of each of California (to include all of Baja), Arizona, New Mexico, and Texas, into a buffer zone aimed at the containment of the drug cartels. At the same time, with global food, fuel and commodity prices soaring, we see inflation performance deteriorating throughout the year and the US Peseta depreciating in line with inflation differentials. As you know domestic CPI inflation in the United States remains stuck in the region of 12-15% while the inflation performance of our trading partners, most notably Canada and Europe remains anchored below 3%.

During the remainder of 2011, we expect to strengthen our net international reserves position somewhat faster than previously projected, and intend to save any revenue over-performance while maintaining strict expenditure control. This will be helped greatly by the anticipated revenues attached to the sale of the State of Hawaii to a consortium led by Club-Link Japan, Nike, and Tiger Woods Inc. Against that, it will take more time than initially thought to finalize the amendments to the new Federal Reserve Board Law and the new Commercial Banking Law. We have prepared a first draft of these amendments which go beyond the scope of the program, incorporating additional recommendations from the Financial Sector Stability Assessment (FSSA) report, and which we will now discuss with Fund Staff. We plan to submit these amendments to Congress by March 2012.

In this difficult global context, macroeconomic policies will be geared toward maintaining stability, while structural reforms will aim at raising the United States’ medium-term growth potential. The 2011 budget targets a modest overall fiscal deficit (excluding the PPIP) of 8.0 percent of GDP, allowing us to raise social spending by over 25 percent and undertake important investments in entitlements, roads, hospitals and other infrastructure. We do not see any scope for any reduction in the growth of net-debt in 2011 due to these important initiatives.

Negotiations with foreign creditors over Instruments and Guarantees issued by the Federal Reserve Board and Treasury are currently ongoing, and we are committed to settling all valid claims promptly while maximizing recoveries from domestic borrowers including the Federal Government. Our structural reform agenda for the remainder of 2011 will focus, inter alia, on: improving the deteriorated financial position and governance of the Federal Reserve Board, enhancing transparency and management at key state-owned enterprises, strengthening tax administration and public financial management, and creating an environment for financial sector re-development.

In line with our commitment to transparency of economic policies, we will continue publishing all SMP-related documents on the IMF’s website as well as the recent FSSA report. In addition, we will publish all key findings of the special audit of the Federal Reserve Board on the Federal Reserve Board’s website. Given the good progress we have made so far under the SMP and our firm commitment to successfully completing our 2011 program, we hope to begin discussions on a new program that could be supported by the Fund under the Poverty Reduction and Growth Facility in early 2012.

Your Excellency, please accept my assurances of my greatest attention to these matters of utmost importance,

Barack Hussein Obama

President of the United States

Posted in Bankruptcy, Bond Market, Economy, Fed Policy, IMF, Regulatory, Restructuring, Sovereign Debt, USA | No Comments »

The Basel II Capital Accord and what it means for investors and borrowers

If you would like a copy of this post please email info@recoverypartners.biz.

Posted in Bank Loans, Banks, Canada, Loan Losses, Regulatory | No Comments »