From the (recent) archives, a Lars Jonung and Werner Roeger report on behalf of the European Union's Directorate-General for Economic and Financial Affairs: The Macroeconomic Effects of a Pandemic in Europe (June 2006).

A brief cherry-picked quote:

"In our baseline scenario we find for the first year of a pandemic, that is for 2006, a supply effect of - 1.1 per cent of GDP and a demand effect of -0.5 per cent, totalling a fall in GDP of - 1.6 per cent. These effects diminish sharply for 2007 and 2008 but a long-run negative effect of - 0.6 per cent remains due to the reduction in the labour force caused by the pandemic. Additional effects can be added to this scenario. If we do so, we end up with an estimate of the GDP loss ranging between 2 and 4 per cent.


Still, such a pandemic does not have to spell economic disaster for Europe. The macroeconomic effects of a future pandemic as estimated here are roughly of the same size as those of a major recession."

If there is already a "major recession" underway all bets are off.

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(*HT to an anonymous commenter at FT Alphaville for the adaptation)

Some 5 minute price interval reactions from around the globe as of 15h00 today (GMT+1h):

French group, Accor Hotels:

British Airways:

Germany's carrier, Lufthansa:

Singapore Airlines (15 minute intervals and includes futures data):

Norway's cruise line Royal Caribbean International:

Spanish meat processor Viscofan:

Finally, two daily charts: of Biota Limited, the Australian license holder of Glaxo's antiviral drug Relenza, up 82% last night Down Under;

and Cipla Limited, the Indian maker of the genetic version of Roche Holding's tamiflu, up a more modest 2.7% on the day:

Al mal tiempo, buena cara.

NB: This entry in the vein of FT Alphaville's earlier post.

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Via Global Finance magazine (free sub here) this "mid year" 2009 list of the world's safest banks:

The soundness of rating agencies rankings and the relative value of the word "safest" notwithstanding there is a curious thing about the first seven names on this list: none are "classic" banking groups in the free-market, stock exchanged sense of the word:

  • KfW is owned by the German Federal Government and its individual member states. Its modern form was created out of Marshall Plan funds and a strong social development mandate
  • La Caisse des Dépôts et Consignations is the French sovereign wealth fund dedicated to sustainable and socially beneficial development in France
  • Bank Nederlandse Gemeenten is owned by the central Netherlands Government, its municpal and provicial authorities and - in its own words - "a water board". Its goal is to minimise the cost of provision of social services
  • Landwirtschaftliche Rentenbank is controlled by the German Federal Government with a mandate to develop and promote German agriculture and its food industry
  • Rabobank, while not a public sector entity, is owned by 153 independent local cooperative banks in the Netherlands. Its roots lie in rural cooperatives and specialised lending to the food and agricultural sector - still its focus today
  • Landeskreditbank Baden-Württemberg Förderbank is a German state bank mandated to finance the economic and social development needs of Baden-Württemberg businesses and residents
  • NRW.Bank is also a German state bank (for North Rhine-Westphalia) with similar aims
Public ownership or a cooperative structure certainly do not guarantee prudence - some of the less thoughtful German public sector financial institutions (IKB, saved coincidentally enough by KfW in 2007; WestLB; and SachsenLB) demonstrated 2 summers ago that direct state guarantees, although helpful with the ratings agencies, made them astoundingly risk tolerant when it came to subprime investments.

Yet those at the top of this list have something else, it seems, differentiating them from their fully-quoted private sector brethren. While Rabobank appears to be is a separate species with the role played by its cooperative structure on its risk management perhaps being significant, the others appear to have benefited from very specific operational foci and/or smaller than average asset bases (and so smaller margins for error) with which to play.

It may also have helped that they perhaps had dedicated professionals who believed their organisations' mission statements were not produced primarily for use by the investor relations departments.

Course, the reality may not be that simple...

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"Our results this quarter reflect the strength of Citi's franchise and we are pleased with our performance." (link)
Citigroup CEO Vikram Pandit

Is there a holiday equivalent to the fortuitous effects of fair value accounting? If so it would have, perhaps, "smoothed out" the derived (dis)pleasure of my Easter break and eliminated the aggravation caused by constant rain, blocked plumbing (and here I pass over the detail), burst pipes and excitable house-bound children in the middle of an isolated French forest.

Citi is suffering the financial parallel of such an experience - yet it is hard to see the distress in their latest quarterly earnings as reported by Bloomberg: $1.6bn of net income! Great Recession? What Great Recession? And the quality of those earnings must be good for Citi say in their statement that:

"The adoption of the changes to FAS 157 had no impact on Citi's financial results."

Fair value accounting and FAS 157 caused, of course, a few ripples earlier this month and even featured here. Citi said at the time it would have no impact and so it has proved - the Good Guys would not stoop to abuse the latitude the new guidance provided for in accounting for toxic assets. Very reassuring - even if the $4.7bn of trading income Citi scored could not exactly be called the solid, low risk, recurring revenue a banking giant requires to sustain itself.

And yet the Bloomberg piece also refers to $2.5bn of mysterious "unrealized" earnings booked by Citi from:

"accounting rules that allows companies to profit when their own creditworthiness declines"

These paper gains reflect increases in the worth of derivative insurance against declines in the value of Citi's own debt and are termed CVA's in the Citi statement. Or more helpfully (maybe) "credit value adjustments". The accounting directive referred to by Bloomberg is, presumably, FAS 159. Which is another one of the Financial Accounting Standard Board's "fair value" statements (surprised?). While its objective:

"to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions."

is reasonable - and the effects can cut both ways - when the bottom line impact equals 156% of net earnings, as it does in Citigroup's case, it is surely questionable whether the statement is truly serving its purpose.

But at least it does, as Mr Pandit states, reflect the true "strength" of the Citigroup franchise.

NB: FAS 159 is the election to use fair value methods on assets AND liabilities; FAS 157 is the guidance on how this should be done. Citi adopted FAS 157 on January 1 2008 (having alread made the FAS 159 election). The statement that the relaxation of FAS 157 would have no offect on the latest results may suggest that there was already enough margin in the deterioration of Citi's liability side (the $2.5bn) to defer use of the softer FAS 157 until a later date.

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Yesterday the US authorities extended the TARP programme to cover certain life insurance companies.

Meanwhile, in the Caribbean, leaders chose last week to establish a fund to provide as yet undefined “liquidity” assistance to the ailing if not terminal giant regional conglomerate (US$16bn of assets) CL Financial and its subsidiaries - which include large life insurance operations.

Of the modest US$80m earmarked for this exercise US$50m are old monies diverted from an existing petroleum subsidy fund put together in 2004 by Trinidad and Tobago. It may well be safe to assume this sum will end up protecting the interests of Trinidadian taxpayers.

Given this realpolitik one CL financial subsidiary, the Barbados-based US$500m (by assets) life insurer Clico International Life, may not see material benefit from the fund. In breach of regulatory reserve requirements, the firm requires capital having been caught out by an aggressive underwriting strategy, too much leverage, falling asset markets and illiquid holdings. Salt in the wounds, it also bought bond-based but derivative-powered “guaranteed return” structured investment products from Deutsche Bank which carry redemption penalties if cashed early. This further hurt its liquidity position.

Which is why, as much of the rest of the CL Financial insurance operations in the eastern Caribbean fall apart, it is in talks brokered by the Government of Barbados to sell up to a competitor. That single suitor is a Bermudan firm of identical gross asset value – Bermuda Fire & Marine (BF&M) – whose capacity to finance an acquisition that will double its size whilst maintaining a prudently structured balance sheet is surely questionable.

Understandably in a small island with rising unemployment and where nearly half of all households have policies with the firm the survival of Clico has become a hot political issue. If BF&M choose to cherry pick – and who would blame them in the current economic context - there will be a rump of operations left over for the local social safety net and taxpayers to deal with. Worse, BF&M could simply walk away.

So it would make sense for the government to hedge by encouraging multiple bids rather than halting the brokering effort at a single potential buyer as they have done. And there is a cheap and elegant method of so acting which might even have a place in the current US context: a sovereign guarantee underwriting against further falls in value the bulk of the riskiest and most illiquid company assets.

The broad template might be this: 90% of said assets are covered with the first 10% of any deterioration to be eaten by the new owners. Falls below that 10% that are covered by the two parties in the same 90:10 proportion. In exchange for this guarantee the government takes preferred shares convertible into up to 15% (say) of the ordinary share base upon re-capitalisation - which is set up on best terms for the taxpayer by the existence of the guarantee itself.

Bar the recapitalisation piece, this was an idea tried by at least one US bank last year with partial success. Except that the absence of new capital hamstrung the initiative. But carried through in its entirety this approach permits taxpayers – for zero cash outlay – to:

  • Cap the potential future portfolio losses of Clico thus making the investment more attractive to more buyers
  • Reassure policyholders with a specific sovereign indemnity thus stemming withdrawal pressure
  • Safeguard local jobs by reinforcing the ongoing commercial solvency of Clico
  • Receive collateral for his guarantee rather than the higher tax bill that might be associated with the likely soft loans of the new "liquidity" fund
  • Secure a nationally strategic stake in and entitlement to the future profits of a recovered business

There are no resources in the Caribbean to do a US-scale TARP or similar. And having but one option in the sale to a private buyer of Clico’s life operations is a needless risk. The net for potential suitors can and ought, with a little imagination, to be cast wider.

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Barclays sponsoring reports on bank capital quality? From today's Wall Street Journal front page website - click for larger image to read the "Heard On The Street" tag in full:

Barclays, currently trading at 162p, passed a UK Financial Services Authority "stress test" last month. The result saw its house broker, Credit Suisse, lay a 'Buy' rating and target price of 170p/share on the firm.

Others without the commercial ties still have doubts - and a 46p target.

Still, someone in Barclays marketing department saw the funny side....

(Disclosure: short BARC)

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As the afterglow of the G20 love-in fades there was something else worth considering this week: the Financial Accounting Standards Board (FASB) decided yesterday to relax its mark-to-market rules.

Nearly from the beginning many financial companies have opposed mark-to-market on the grounds that investors "wouldn't understand" the pricing mechanisms of thin and volatile markets. What was the point, many argued, in adopting a system that simply highlighted pointless earnings volatility quarter after quarter?

Interestingly, these arguments lost some passion once the same financials heard the kerching! of the Easy Al economy ringing in recognition of their unrealised asset gains. It was all one way, it seemed. Only it wasn't. And now - of course - everyone claims to be holding to maturity or that the market for their asset is temporarily "not active".

FASB has taken these issues on board and with its proposed FSB 157 will be asking firms to make what are, essentially, economic judgements. Very reasonable. But those judgements are also an increase in wiggle room in the remuneration game. Without inputting the slightest ignoble motive to the FASB proposal it is simply hope against experience to give an inch and not expect to lose a yard in this particular principal-agent problem.

It seems a long time ago that Ken Lay and Jeff Skilling hid losses of over $1 billion off the balance sheet. The fair value accounting principals were part of the response to that fraud. Those who claim mark-to-market is the problem and markets have badly over reacted because of it ought to put their money where their mouths are and buy up what is so cheap.

History, though, consistently shows that over reactions are a function of psychology combing with reality, not accounting rules. Banks, it seems, now find reality to be materially overrated.

The bottom line is that, whilst imperfect, fair value accounting has improved disclosure, highlighted issues and thus kept the market more honest than it otherwise would have been. That is why is ought to remain in place, undiluted.

Unfortunately, the keys may just have been given to the inmates.

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Couple of tag clouds of the most recent G20 communiqué compared to that issued last November:

Analysis 1: November 2008

Analysis 2: April 2009

Seems this time we are to have even more Global Financial Action and Support Agreed by more Countries. Which means, presumably, that we can all move on from November's lesser quantity of Actions aimed at International Financial Markets, Regulators and Development.


Buy, buy, buy.

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Markets aren't with Europe and US futures well up.

For a fora that is now 10 years old and of doubtful worth to the 12 countries added to it from the "core" G7 (the 13th member is the EU bloc) it has understandably got a lot of press in recent times.

The G-20, of course, sprung up after the 1997 Asian crisis. By 1999 when it was formally constituted everyone had recognised the dangers of unfettered capital flows, weak banking systems and risky private sector lending. It was thoroughly realized that these weaknesses could spread and magnify crisis regionally - and even globally. In the face of such a systemic threat the G-20 had to act and Do Something like hold a series of multi million dollar conferences in order to...wait a second...sounds oddly familiar....

Enjoy the rally and the fine communiqué bound to come by early afternoon. But spare a moment for this Der Spiegel interview with Joe Stiglitz published yesterday from which the following quote is taken:

"The governments will find the words to put a positive spin on the conference. If they can do anything, they can do that. Everyone will say that more regulation is necessary and that balance is needed between national sovereignty and common action in a globalized world. But how much substance will lie behind their words? I'm skeptical. "

NB: Photo credit to Getty Images from which this is a severe crop. Full pic here.

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When it crossed the wire services yesterday I checked the calender wondering how I'd lost a day. The headline was:

"Alan Greenspan says he would start a bank if he were 60 years younger"

Yet it wasn't a joke (apparently). This from the Wall Street Journal today:

"Mr. Greenspan joked that if he were "60 years younger" he would start a small bank, given the "very wide" spread between rates on good loans and the cost of capital...For a bank, that's like "shooting fish in a barrel," Mr. Greenspan said." (link)

Mr Greenspan is a man who knows a thing or two about negative real interest rates and the cost of capital. But somewhat less about "good loans". His borrowers would love him; his shareholders would be wise to check the collateral.

NB: Painting by Geoffrey Raymond. Check out his blog here.

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It takes either courage, money or a moment of carelessness to hand back the wine list to a sommelier in a Michelin 3 star restaurant with the words "Etonnez-nous" ("surprise us").

Yet that, not so long ago, is what one regional entrepreneur did here when hosting visiting American buyers at La Maison de Marc Veyrat situated on the water’s edge at the Lac d’Anncey. If the trip up the Grésivaudan valley by helicopter had been a marvel of stunning alpine scenery the cuisine "montagnarde" that followed was, for gourmands, its equal.

In due course the bill appeared. The sommelier had been true to his instructions and the sum owed earned an abrupt faux humorous break in the conversation. Payment made, all piled back into the helicopter and headed off.

The employees present were sworn to secrecy as to the amount - "spectaculaire" is how it was described – but whatever the guests thought of dropping a small fortune on a wine bill seemed, fortunately, to be forgotten as the owner successfully cut his deal with them later that month.

However, what the host did not know at the time is that later in the week the clients were driven into Grenoble by some of his executives for a relaxed locally-made beer and croque-monsieur. Having not uttered a word of critical judgement on the Veyrat cooking or extravagant wine bill this fodder was generously praised to the skies by the visitors. Much back-slapping and joviality ensued long into the night.

Now, I’m not saying a toasted ham and cheese sandwich saved and/or sealed the deal. But it probably didn't torpedo it either...horses for courses.


  • La Maison de Marc Veyrat shut down earlier this year whilst Monsieur Veyrat continues his recovery from a skiing injury
  • The entrepreneur subsequently sold a majority interest in his firm over (allegedly) a Big Mac and fries to US private equity during covenant-lite times
  • This is good local beer

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