FT Alphaville » Charting sovereign bond holdings across the eurozone

Charting sovereign bond holdings across the eurozone

So which European country might be seeing foreign investors fleeing its sovereign bond market, leaving domestic banks to take up the slack?

Spain of course.

Much has been made of the eurozone sovereign/banking crisis loop, especially in Spain’s case where the banks are taking on more sovereign risk just as the banks themselves are being bailed out.

But we actually have very little hard data to look the picture over time and across Europe in a directly-comparable way.

Helpfully, Jean Pisani-Ferry and Silvia Merler at Bruegel, a Brussels-based think tank, have painstakingly put together a dataset of sectorial sovereign bond holdings for eleven EU countries as well as the US. They break down a country’s debt issues into holdings by resident banks, the central bank, other public institutions, other residents and non-residents. The research follows on from their ‘Who’s afraid of sovereign bonds?’ paper in February, which looked the role of eurozone banks in holding domestic government bonds.

The data goes back to the late 1990s in most cases and is broken down — the full dataset and methodology is up on the Bruegel’s website.

Pisani-Ferry and Merler have charted bond holdings by a country’s domestic banks along with holdings by non-residents, showing both the build-up of sovereign debt on the books of local banks and the “flight to safety” by non-residents.

Let’s start with the peripherals:

The cases of Spain, and then Germany and Finland are perhaps the most striking with the lines inverting in the former, and very much diverging in the latter:

The ‘flight to safety’ is easy to see in the core countries as well as in the UK.

A quick note on the UK in case you are wondering why the line dips below zero:

The break-down can be reconstructed for long-term government bonds issued by the UK central government, looking at the UK’s sector financial accounts. To isolate the Bank of England we relied on data on the bank’s holding of sterling securities issued by the public sector, provided by the Bank of England itself. For some years, MFIs’ [Monetary Financial Institutions] holdings of securities are recorded with a negative sign. This is the result of the accounting practice chosen, as holdings of gilts are reported net of long and short positions.

Pisani-Ferry and Merler conclude:

These observations raise a question about the effectiveness of ECB provision of liquidity to banks as a means to alleviate the sovereign crisis. At a point when government bonds are considered risky assets, euro-area banks are faced with both balance sheet and reputational risks compared to their non-euro area counterparts, and may prove reluctant to increase this exposure further.

Related links:Who’s afraid of sovereign bonds? – Bruegel

State-backed bond-buyers? – FT Alphaville

This entry was posted by Masa Serdarevic on Wednesday, August 29th, 2012 at 13:15 and is filed under Capital markets.
Read the article online here: FT Alphaville » Charting sovereign bond holdings across the eurozone

I Love U Dad!! (BN) Carl #Icahn Hands Son Brett $3 Billion to Prove His Mettle

Carl Icahn Hands Son Brett $3 Billion to Prove His Mettle

Carl Icahn agreed to allocate as much as $3 billion to a management duo composed of his son Brett and David Schechter, expanding their role in running the 76- year-old's investments.

Under a 46-page legal agreement filed with federal regulators last month, Brett Icahn and Schechter will get to invest their boss's capital in companies with stock market values between $750 million and $10 billion. The deal may free the elder Icahn, who still has final say over many aspects of the portfolio, to focus on larger targets for shareholder activism.

Brett, who turns 33 this month, along with Schechter has been running $300 million for his father, who owns more than 90 percent of Icahn Enterprises LP, a holding company with $24 billion in assets including activist investing partnerships as well as the Tropicana casinos, an oil refiner and an auto-parts maker. The arrangement expires after Carl turns 80 in 2016, giving Brett the chance to both prove his mettle as a successor and develop a track record to start his own hedge fund.

"It's a pretty nice gesture by the old man," said Michael McAllister, a partner at Satterlee Stephens Burke & Burke LLP in New York who specializes in employment law within the securities industry. "If the son doesn't meet the standard Carl is looking for, it gives Brett an opportunity to go out and earn his own."

After hiring Brett as an investment analyst a decade ago, Icahn allocated the $300 million to his son and Schechter in April 2010 to invest in loans and securities of companies with less than $2 billion in equity value. Their investments, internally dubbed the Sargon portfolio, generated a gross cumulative gain of 96 percent by the end of June, according to a July 27 filing with the U.S. Securities and Exchange Commission.

'Can't Complain'

Schechter joined the firm in 2004 after working at a Citigroup Inc. unit that used the bank's capital to invest in distressed companies. Schechter, who earned an economics degree from the University of Pennsylvania, serves on the boards of several companies in which Icahn holds stakes, including WebMD Health Corp. (WBMD) and auto-parts supplier Federal-Mogul Corp. (FDML)

"These two guys doubled our money over the last two years," the elder Icahn said in an interview. "You can't complain about that." Brett didn't return an e-mail seeking comment.

The filing included a new accord that Icahn reached on July 24 with Brett and Schechter. Icahn Enterprises will allocate as much as $2.4 billion in its investment unit to the duo, including the money they already have under management, while High River LP, one of the elder Icahn's personal investment vehicles, will chip in $600 million.

The agreement stipulates that Carl will set the investment strategy and maintain oversight of the managers, who must get their boss's approval for certain investments.

Hedging Tools

The two can hedge their investments using futures and options on the Standard & Poor's 500 (SPX) and Russell 2000 Indexes, and enter into short sales on securities they already hold. Such hedges are limited to $80 million of invested capital on any one security or index, and their total short positions can't exceed the combined value of their investments, or long positions. Short sales, used to profit from or protect assets against market declines, involve borrowing a stock or bond and then selling it in anticipation of a price decline.

When the agreement expires, Brett Icahn and Schechter will be able to disclose the track record they've established at Sargon to "market a permitted fund," according to the SEC filing. Should they decide to start their own fund, Icahn Enterprises and High River would be entitled to receive 15 percent of their gross management and incentives fees "in perpetuity," in return for an investment of at least $20 million in the fund.

Cohen, Robertson

"You see this in the larger investment houses," said Gary Goldstein, the chief executive officer of New York-based Whitney Group LLC, an executive search firm that focuses on financial services. "Steven Cohen does a very similar construct and Julian Robertson had a very similar concept," Goldstein said, citing two hedge-fund managers known for hiring young traders who go on to form their own firms.

Under terms of the new Icahn agreement, the managers are entitled to a lump-sum payment equaling 7.5 percent of any profits that exceed an annual 4 percent compounded hurdle rate.

Icahn Enterprises' investment unit had net assets of about $5.6 billion as of June 30, including $1.3 billion in cash, according to a Form 10-Q that the holding company filed Aug. 7 with the SEC. Icahn ran it as an activist hedge fund until 2011, when he returned the capital he had received from outside clients.

Activist Strategy

Icahn primarily takes stakes in companies he deems under- performing and then lobbies management to take steps to boost their share prices, such as stock buybacks, asset divestitures, or putting the entire enterprise up for sale. His previous targets have included Time Warner Inc., Motorola Inc., Biogen Idec Inc. (BIIB) and Yahoo! Inc.

Brett also has served on the boards of several companies that Icahn invested in, including Take-Two Interactive Software Inc. (TTWO) and Hain Celestial Group Inc. (HAIN) He is a graduate of Princeton University, where his father earned a philosophy degree.

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

Robert Samuelson: Why U.S. economic policy is paralyzed - The Washington Post

This piece from last month sums up well the mess we're in with regards to the deficit.

Why U.S. economic policy is paralyzed

Wondering why government can’t restart the sluggish economy? Well, one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II. This occurred a half-century ago and helps explain today’s policy paralysis. The history — largely unrecognized — is worth recalling.
Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles.

None of this proved true; all of it led to grief.
Chapter One involved inflation. Increases weren’t modest; by 1980, they approached 14 percent annually. Business cycles weren’t smoothed; from 1969 to 1981, there were four recessions. Unemployment, on average, didn’t fall; the peak monthly rate — reached in the savage 1980-82 slump — was 10.8 percent. Americans lost faith in government and the future, much as now. Confidence revived only after high inflation was quashed in the early 1980s.
Now comes Chapter Two: How the retreat from balanced budgets has weakened America’s response to today’s downturn, the worst since the Great Depression. It has limited government’s ability to “stimulate” the economy through higher spending or deeper tax cuts — or, at least, to have a meaningful debate over these proposals. The careless resort to deficits in the past has made them harder to use in the present, when the justification is stronger.
The balanced-budget tradition was never completely rigid. During wars and deep economic downturns, budgets were allowed to sink into deficit. But in normal times, balance was the standard. Dueling political traditions led to this result. Thomas Jefferson thought balanced budgets would keep government small; Alexander Hamilton believed that servicing past debts would preserve the nation’s credit — the ability to borrow — when credit was needed.
Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered this consensus. They contended that deficits weren’t immoral and could be manipulated to boost economic performance. This destroyed the intellectual and moral props for balanced budgets.
Norms changed. Political leaders and average Americans noticed that continuous deficits did no great economic harm. Neither, of course, did they do much good, but their charm was “something for nothing.” Politicians could spend more and tax less. This appealed to both parties and the public. Since 1961, the federal government has balanced its budget only five times. Arguably, only one of these (1969) resulted from policy; the other four (1998-2001) stemmed heavily from the surging tax revenue of the then-economic boom.
We are now facing the consequences of all these permissive deficits. The recovery is lackluster. Economic growth creeps along at 2 percent annually or less. Unemployment has exceeded 8 percent for 41 months. But economic policy seems ineffective. Since late 2008, the Federal Reserve has kept interest rates low. And budget deficits are enormous, about $5.5 trillion since 2008.
Only one group of economists has a coherent response: Keynesians. Led by New York Times columnist Paul Krugman, they argue that the deficits haven’t been large enough. If consumers and businesses aren’t spending enough to revive the economy, government must substitute. Its support would be temporary until more jobs and profits strengthened private spending. Sounds convincing.
But it collides with the 1960s’ legacy. Running routine deficits meant that the federal debt (all past annual deficits) was already high before the crisis: 41 percent of the economy, or gross domestic product (GDP), in 2008. Huge deficits have now raised that to about 70 percent of GDP; Krugman-like proposals would increase debt further. It would approach the 90 percent of GDP that economists Kenneth Rogoff of Harvard and Carmen Reinhart of the Peterson Institute have found is associated with higher interest rates and slower economic growth.
Since 1800, major countries have experienced 26 episodes when government debt has reached 90 percent of GDP for at least five years, they find in a study done with Vincent Reinhart of Morgan Stanley. Periods of slower economic growth typically lasted two decades.
Now, imagine that the country had adhered to its balanced-budget tradition before the crisis. Some deficits would have remained, but the cumulative debt would have been much lower: plausibly between 10 percent and 20 percent of GDP. There would have been more room for expansion. Balancing the budget might even have forced Congress to face the costs of an aging society.
The blunder of the Sixties has had a long afterlife. Economic policy is trapped between weak demand and the fears of too much debt. Yesterday’s Keynesians undercut today’s Keynesians. “In the long run we are all dead,” Keynes said. But others are alive — and suffer from bad decisions made decades ago.
 Robert Samuelson: Why U.S. economic policy is paralyzed - The Washington Post

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