* Spanish bond shortage distorts repo market
* Italian rates rise but market still functioning
* Interbank cash rates fall on rate cut expectations
By Kirsten Donovan
LONDON, June 18 (Reuters) - A lack of available Spanish government bonds, due to so many being used to obtain funding at the European Central Bank, is distorting pricing in repo markets and causing investors headaches as they seek to cover hefty short positions.
As international investors sold Spanish government bonds this year, domestic banks bought them and parked them at the ECB in return for funds - particularly during the two recent three-year funding operations.
As a result, investors who need the bonds because of their own short positions must pay a premium for the paper.
When this happens in repo markets - where banks commonly use government bonds as collateral to raise funding - bonds are said to be trading "special".
Effectively, the investor who needs the bonds pays a premium to their counterparty in the trade - the opposite of a typical repo trade where the party borrowing cash pays the premium.
"There's some good evidence of a collateral shortage out there," said ICAP rate strategist Chris Clark. "Quite a lot may be being used at the ECB and the market short (positions) out there will be increasing the demand for specific bonds."
It is the opposite of what might be expected when a country's debt comes under pressure. Then counterparties are usually more reluctant to be left holding the bonds.
"The collateral just isn't there. That's one of the problems and the few bonds that are still available are highly sought after by people who want to cover their short positions," said Commerzbank rate strategist Benjamin Schroeder.
Ten-year Spanish government bond yields have risen more than 130 basis points since the start of May, while two-year yields are up over 2 percentage points.
That prompted international clearing house LCH.Clearnet SA to increase the cost of using Spanish bonds to raise funds via its repo service last month. Analysts said their trading desks had since seen volumes over the platform drop.
"It's a further segregation of European money markets, where banks are retreating from central clearing houses and going back to domestic clearing or bilateral agreements," Schroeder said.
As the euro zone debt crisis intensified this month, mainly due to worries about Spain's banking sector, Italian general collateral (GC) repo rates, paid to borrow funds against a basket of government bonds, have been pushed higher.
There is little trade in the Spanish general collateral market but banks are still able to borrow using Italian bonds as collateral, despite Italy being seen as vulnerable to contagion from worries about Spain.
Three-month Italian GC rates rose to 0.42 percent at the end of last week, compared to the Eonia overnight rate at around 30 basis points, according to ICAP. The Italian rate had traded below Eonia from the time of the ECB's second three-year funding operation at the end of February until the end of May.
"There's been a rise in Italian general collateral rates, both outright and relative to the Eonia OIS curve," ICAP's Clark said. "Despite a reduction in the amount of term activity that goes on, the Italian market is still very much functional."
RATE SPECULATION
Three-month Euribor interbank lending rates eased again, hitting their lowest since the second quarter of 2010 as speculation grew the ECB may cut interest rates.
ECB president Mario Draghi heightened expectations the bank could cut interest rates or take further policy action soon after saying on Friday that the euro zone economy faced serious risks and no inflation threat.
September and December Euribor futures contracts rallied to contract highs, pushing implied rates lower.
Markets are pricing in a 50 percent chance of a 12.5 basis point cut in the ECB's 0.25 percent deposit rate this year, and a 25 percent of the rate being cut to zero, according to RBS.
Finance: A union to bank on - Financial Times
June 18, 2012 7:21 pm
German finance minister welcomes Greek conservatives' win as decision to push on with reform - Greenfield Daily Reporter
BERLIN — Germany's finance minister greeted the conservative New Democracy party's projected win in Greek elections Sunday as a decision to "forge ahead" with implementing far-reaching reforms. Germany's foreign minister said it's important for Greece to stick to its agreements with creditors, but held out the prospect that Athens might be given more time to comply with them.
New Democracy party beat the radical-left Syriza party into second place on Sunday and immediately proposed forming a pro-euro coalition government — a development that eased, at least briefly, fears that the vote would unleash economic chaos.
Germany — Europe's biggest economy — has been a major contributor to Greece's 2 multibillion-euro rescue packages and a key advocate of demanding tough, and highly unpopular, austerity and reform measures in exchange.
If New Democracy's win is confirmed, Germany "would consider such a result a decision by Greek voters to forge ahead with the implementation of far-reaching economic and fiscal reforms in the country," German Finance Minister Wolfgang Schaeuble said in a statement.
The austerity and reform program aims only "to put the country back on the path of economic prosperity and stability," he added. "This path will be neither short nor easy but is necessary and will give the Greek people the prospect of a better future."
"In order to succeed, the program requires political stability," Schaeuble said.
Foreign Minister Guido Westerwelle told ARD television earlier Sunday, shortly after exit polls showed a neck-and-neck race, that "we want Greece to stay in the euro; we want Greece to continue wanting to belong to Europe." But he stressed that it was for Greece to decide on its future path, and said that "you cannot stop anyone who wants to go."
Westerwelle said it was important for Greece to form a pro-European government that sticks to the agreements with creditors.
Debt inspectors from the EU, the European Central Bank and the IMF who are managing the Greek bailout regularly check progress in implementing its conditions to determine whether Greece can secure further aid payouts. Westerwelle insisted that the substance of the bailout agreements must remain unchanged, but signaled some flexibility on deadlines.
"There cannot be substantial changes to the agreements, but I can well imagine talking again about timelines, against the background of the fact that, in reality, there was a political standstill in Greece over recent weeks because of the elections," he said. "But there is no way past the reforms — Greece must stand by what has been agreed."
Public debt: We’re mortgaging their future - Daily Telegraph
The rapidly rising quantity of these bonds certainly implies a growing charge on those in employment, now and in the future, since – even if the current low rates of interest enjoyed by the biggest sovereign borrowers persist – the amount of money needed to service the debt must inexorably rise.
But the official debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like – to give the biggest American programmes – Medicare, Medicaid and Social Security.
The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly 13 times the debt as stated by the US Treasury. Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.
These mind-boggling numbers represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obligated by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditure.
To illustrate the magnitude of the problem, the economist Laurence Kotlikoff calculates that to eliminate the federal government’s fiscal gap would require either an immediate 64 per cent increase in all federal taxes or an immediate 40 per cent cut in all federal expenditures.
When Kotlikoff compiled his “generational accounts” for the United Kingdom more than 12 years ago, he estimated (on what proved to be the correct assumption that the then government would increase welfare and health care spending) that there would need to be a 31 per cent increase in income tax revenues and a 46 per cent increase in National Insurance revenues to close the fiscal gap.
In his Reflections on the Revolution in France (1790), Edmund Burke wrote that the real social contract is not Jean-Jacques Rousseau’s contract between the sovereign and the people or “general will”, but the “partnership” between the generations. He writes: “SOCIETY is indeed a contract… The state … is … a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.” In the enormous intergenerational transfers implied by current fiscal policies we see a shocking and perhaps unparalleled breach of precisely that partnership, so brilliantly described by Burke.
I want to suggest that the biggest challenge facing mature democracies is how to restore the social contract between the generations. But I recognise that the obstacles to doing so are daunting. Not the least of these is that the young find it quite hard to compute their own long-term economic interests.
It is surprisingly easy to win the support of young voters for policies that would ultimately make matters even worse for them, like maintaining defined benefit pensions for public employees. If young Americans knew what was good for them, they would all be in the Tea Party.
A second problem is that today’s Western democracies now play such a large part in redistributing income that politicians who argue for cutting expenditures nearly always run into the well-organised opposition of one or both of two groups: recipients of public sector pay and recipients of government benefits.
Is there a constitutional solution to this problem? The simplistic answer – which has already been adopted in a number of American states as well as in Germany – is some kind of balanced-budget amendment, which would reduce the discretion of lawmakers to engage in deficit spending, much as the practice of giving central banks independence reduced lawmakers’ discretion over monetary policy.
The trouble is that the experience of the financial crisis has substantially strengthened the case for using government deficit as a tool to stimulate the economy in times of recession.
Last year, following a German lead, continental European leaders sought to solve that problem by resolving to limit only their structural deficits, leaving themselves room for manoeuvre for cyclical deficits as and when required. But the problem with this “fiscal compact” is that only two eurozone governments are currently below the mandated 0.5 per cent of GDP ceiling; most have structural deficits at least four times too large, and experience suggests that any government that tries seriously to reduce its structural deficit ends up being driven from power.
It is perhaps not surprising that a majority of current voters should support policies of intergenerational inequity, especially when older voters are so much more likely to vote than younger voters.
But what if the net result of passing the bill for baby boomers’ profligacy is not just unfair to the young but economically deleterious for everyone? What if uncertainty about the future is already starting to weigh on the present? As Carmen Reinhart and Ken Rogoff have suggested, it is hard to believe that developed country growth rates will be unaffected by mountains of debt in excess of 90 per cent of GDP.
It seems as if there are only two possible ways out of this mess. In the good but less likely scenario, the proponents of reform succeed, through a heroic effort of leadership, in persuading not only the young but also a significant proportion of their parents and grandparents to vote for a more responsible fiscal policy. As I have already explained, this is very hard to do. But I believe there is a way of making such leadership more likely to succeed, and that is to alter the way in which governments account for their finances.
The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon. No legitimate business could possible carry on in this fashion.
Public sector balance sheets can and should be drawn up so that the liabilities of governments can be compared with their assets. That would help clarify the difference between deficits to finance investment and deficits to finance current consumption.
Governments should also follow the lead of business and adopt the Generally Accepted Accounting Principles. And, above all, generational accounts should be prepared on a regular basis to make absolutely clear the intergenerational implications of current policy.
If we do not do these things then I am afraid we are going to end up with the bad, but more likely, second scenario. Western democracies are going to carry on in their current feckless fashion until, one after another, they follow Greece and other Mediterranean economies into the fiscal death spiral that begins with a loss of credibility, continues with a rise in borrowing costs, and ends as governments are forced to impose spending cuts and higher taxes at the worst possible moment.
There is, it is true, a third possibility, and that is what we now see in Japan and the United States, maybe also the United Kingdom. The debt continues to mount up. But deflationary fears, central bank bond purchases and flight to safety from the rest of the world keeps government borrowing costs down to unprecedented lows. The trouble with this scenario is that it also implies low to zero growth over decades.
As our economic difficulties have worsened, we voters have struggled to find the appropriate scapegoat. We blame the politicians whose hard lot it is to bring public finances under control. But we also like to blame bankers and financial markets, as if their reckless lending was to blame for our reckless borrowing. We bay for tougher regulation, though not of ourselves.
This is an edited extract from the first of Prof Niall Ferguson’s four Reith Lectures, to be broadcast today on Radio 4 at 9am
Tech boffins: Spend gov money on catching cyber crooks, not on AV - The Register
The UK government should be spending more on catching cybercriminals instead of splurging taxpayers' money on antivirus software, tech boffins have said.
Blighty goes through around £639m a year trying to clean up after attacks or prevent threats – including £108m it spends on antivirus – but the country is only spending £9.6m on techy law enforcement, a University of Cambridge study found.
"Some police forces believe the problem is too large to tackle," Ross Anderson, professor of security engineering at the University of Cambridge’s Computer Laboratory, said in a canned statement.
"In fact, a small number of gangs lie behind many incidents and locking them up would be far more effective than telling the public to fit an anti-phishing toolbar or purchase antivirus software."
The Cabinet Office said it welcomed "this latest contribution to the debate on cybercrime".
"The government believes the threat is serious and needs to be tackled and that is why we have rated cyber as a Tier 1 threat. Raising awareness and building capacity to resist threats continues to be our focus," a spokesperson told The Reg in an emailed statement.
"That includes investing in law enforcement capability to detect and apprehend cyber criminals. But we also think it is important to make sure people have the information they need to take steps to protect themselves."
The study, which was started after a request from the Ministry of Defence, also said that the amount of money the UK was losing as a result of cybercrime was being exaggerated.
"For instance, a report (PDF) released in February 2011 by the BAE subsidiary Detica in partnership with the Cabinet Office’s Office of Cybersecurity and Information Assurance suggested that the overall cost to the UK economy from cyber-crime is £27 billion annually," the research said.
"That report was greeted with widespread scepticism and [was] seen as an attempt to talk up the threat; it estimated Britain's cybercrime losses as £3bn by citizens, £3bn by the government and a whopping £21bn by companies. These corporate losses were claimed to come from IP theft (business secrets, not copied music and films) and espionage, but were widely disbelieved both by experts and in the press."
Using figures ranging from 2007 to 2012, including some which are "extremely rough estimates" based on data or assumption for the reference area, the study reckoned that all the costs of cybercrime both direct and indirect came out at around £11.7bn.
UK.gov – Cybercrime is expensive
The Cabinet Office spokesman said that Detica was best placed to explain its own methodology, but still disagreed somewhat with the study's conclusions.
"The Cyber Security Strategy was clear that a truly robust estimate would probably never be established, but that the costs are high and rising," he said.
"That said, we think there are grounds for believing that the true cost is higher than the £11bn quoted by Cambridge University.
"For example, the authors say that they can't find any hard evidence of the cost of IP theft and have therefore concluded this doesn't impose any costs beyond the defensive measures they refer to elsewhere in the paper. However, there are suspected cases of IP theft in the public domain and the costs are not nil.”
Aside from differing opinions on the cost of cybercrime, the research team also reckoned that some existing meatspace crime was moving online and being tallied up as part of the cyber cost.
The study pointed out that fraud in the welfare and tax systems, which now often takes place online, is probably costing Brits a few hundred pounds a year on average while card and bank fraud cost a few tens of pounds a year per citizen.
However, what they call 'true cybercrime', scams that completely depend on the internet, are only costing a few tens of pence a year, while the cost of antivirus software can be hundreds of times that.
Basically, the indirect costs of folks trying to protect themselves from cybercriminals actually end up costing them more.
"Take credit card fraud," said Richard Clayton, expert in the econometrics of cybercrime in Cambridge’s Computer Lab. "Direct loss is clearly the monetary loss suffered by the victim.
"However, the victim might then lose trust in online banking and make fewer electronic transactions, pushing up the indirect costs for the bank because it now needs to maintain cheque clearing facilities, and this cost is passed on to society.
"Meanwhile, defence costs are incurred through recuperation efforts and the increased security services purchased by the victim. The cost to society is the sum of all of these," he explained.
The research team concluded that there should be less spent on antivirus and firewalls and other preventative measures and "an awful lot more" on catching and punishing the perpetrators.
The study (PDF, 346KB) is due to be presented at the 11th annual Workshop on the Economics of Information Security (WEIS), which takes place in Berlin on 25 and 26 June. ®
Man Group finance director Kevin Hayes steps down - BBC News
Kevin Hayes has stepped down as finance director of struggling hedge fund firm Man Group on the day the company is demoted from the FTSE 100.
Jonathan Sorrell, Man's head of strategy and corporate finance, will replace him at Europe's largest listed hedge fund.
Man, whose shares have slumped, is being replaced in the FTSE 100 list of the UK's leading companies by Babcock.
Mr Hayes is leaving to pursue "other interests", Man said in a statement.
He joined Man in 2007.
Man Group shares have tumbled since the last FTSE review in March, and are down almost two-thirds since last year.
The firm's funds have struggled as cautious clients withdraw money because of the market turmoil caused by the eurozone debt crisis.
Mr Sorrell, son of WPP advertising chief Sir Martin Sorrell, spent more than a decade at Goldman Sachs before joining Man last August.
In a statement, Man chief executive Peter Clarke said Mr Sorrell's experience "will be extremely valuable as we continue to develop and evolve in challenging world markets".
Tough luck, Generation X: Only half of wealthy Baby Boomers to leave money for their kids...and ONE IN THIRD would rather give it to charity - Daily Mail
- Baby Boomers defined as people between the ages of 47 and 66
- Generation X refers to people born between early 1960s and early 1980s
- 55 per cent of Baby Boomers believe it's important to leave money to offspring
- Most Baby Boomers believe each generation should earn its own wealth
- Three-quarters of people younger than 46 favor leaving money to kids
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When members of the Baby Boomers generation die in the next 50 years, they will leave trillions of dollars in wealth behind, but their children should not hold their breath for a large inheritance.
According to the U.S. Trust Insights on Wealth and Worth annual study released on Monday, only 55 per cent of Baby Boomers - those between the ages of 47 to 66 - think it is important to leave money for their offspring.
U.S. Trust commissioned an independent, national survey of 642 high net worth adults, who were not clients, with at least $3million in investable assets.
Givers: A study found that 31 per cent of wealthy Baby Boomers would prefer to leave their money to charity
One of three Baby Boomers surveyed – about 31 per cent - don’t think it is important to leave a financial inheritance and said they would rather leave money to charity than to their children.
By contrast, three-quarters of wealthy people under age 46 said it's a priority to leave inheritance for their children.
The top reason for not wanting to leave money for their kids is the belief shared by some Baby Boomers that each subsequent generation should work to earn its own wealth.
Following closely behind is the thought that it is more important to invest in children’s success while they are growing up.
‘Our survey points to a shift in generational behavior and outlook, most likely shaped by personal experience and societal responses to economic realities,’ said Keith Banks, president of U.S. Trust.
Banks added that well-off parents are concerned that the next generation is not prepared to inherit wealth, which is not surprising considering the fact that most of the Baby Boomers surveyed don't talk to their kids about money: just 37 per cent said they've fully disclosed their net worth to their children.
Kept in the dark: Just 37 per cent of Baby Boomers said they've fully disclosed their net worth to their kids
Those over age 67 said they weren't having this discussion because they were raised to avoid money talk, while younger respondents said they didn't want to inhibit their kids' work ethic.
Unlike the majority of people from her generation, 63-year-old Kathleen Taylor, of Chimacum, Washington, taught her two grown children since they were young to be responsible for their own money.
That is why she plans to leave most of her money to her children and some money to charitable causes, ABC News reported.
One way Taylor and her husband taught their children about responsible spending was providing the value of college tuition, room and board to each of them and putting them in charge of paying the bills.
‘People thought we were crazy,’ she told ABC.
The Taylors plan to start a college fund once their children start having their own kids. And they intend to add to it on their grandchildren’s birthdays as long as Taylor and her husband are alive.
Mrs Taylor said she hopes her own children will do the same for their great-grandchildren.
The U.S. Trust study also has found that 42 per cent of Baby Boomers and 54 per cent of those under age 46 are paying medical costs for their parents or other relatives.
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