Credit Excess / Baltics
Anschnallen! Wir haben den eindeutigen Gewinner in Sachen "Easy Credit" gefunden. . Die nachfolgenden Charts und Daten verschlagen einen aber wirklich den Atem....... Das erklärt natürlich auch diesen Bericht über den baltischen Immobilienmarkt.
Banking Risks Rise in Eastern Europe
Credit to the private sector has expanded at a fast clip in central and eastern Europe during the past decade, outpacing most other regions of the world.
Rapid credit growth (see Chart 1) reflects a number of factors:
• low levels of financial development and pent-up demand pressures following decades of socialist economic management;
• good macroeconomic discipline and membership in the European Union (EU), which lowered country risk premiums; and
• improved access to foreign capital following the entry of foreign banks and the opening of capital accounts.
Assessing the risks
Rapid credit growth has brought important benefits, helping channel domestic and foreign savings to households and investors and supporting financial sector development and economic growth in the region. But the brisk expansion of credit is raising concerns about macroeconomic and prudential risks (that is to say, whether banks remain sound).
Quantifying these risks is a challenge because countries in central and eastern Europe have not gone through a full credit cycle yet, and financial soundness indicators tend to improve in the upward phase of the credit cycle.
But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency. 
> from Baltic blues / Economist
How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.
Banking risks on the rise
On the surface, rapid credit growth in central and eastern Europe does not appear to have weakened banks. (It remains to be seen how the current turmoil in financial markets will affect banks in the region, but so far there have been no signs of a major fallout.) However, the reason financial soundness indicators are not yet pointing to a deterioration in credit quality could be that they are based on systemwide statistics rather than reflecting assessments of data from individual banks and there is a lag before bank data become publicly available.
Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.
Our findings underscore the importance of forward-looking and risk-based supervision to keep the risks associated with rapid credit growth at manageable levels while maximizing the benefits of credit for financial development and economic growth.
In particular, supervisors need to give more attention to weaker banks that are growing rapidly. This would also be consistent with the risk-based approach to supervision that central and eastern European countries are moving to as they implement the new capital adequacy accord, known as Basel II.
Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis
But experience in industrial and emerging market countries suggests that credit booms can be associated with unsustainable domestic demand booms, overheating, and asset price bubbles. Financial sector difficulties also cannot be ruled out—for example, loan losses may occur during a deep recession or following a large exchange rate depreciation if loans are denominated in foreign currency.
How significant these risks are in central and eastern Europe and what role public policy should play in containing them are key questions facing policymakers.
Banking risks on the rise
Our analysis suggests that the granting of credit is becoming increasingly divorced from bank soundness—all banks, including weak ones, seem to be expanding at an equally rapid pace. This suggests that prudential risks are on the rise.
Increased prudential risks are most apparent in the fastest-growing credit markets. These markets include lending to households, foreign currency-denominated or indexed lending, and lending in the three Baltic countries, where weaker banks are expanding at a faster rate than sounder banks (see Chart 2). A stronger policy response is thus warranted in each of these markets. Such a response may involve, for example, higher capital requirements and tighter loan classification and provisioning rules, differentiated on a bank-by-bank basis
Labels: baltic, carry trade, consumer credit, credit availability, creditbubble, emerging markets, excess liquidity
posted by jmf at 11:28 PM
0 comments
Taken from 
``The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. ``They'll say that's your problem and that's why we're paying you: To take risk.''
> 
But as the rating agencies have now discovered, fraud played a part too. Everybody had an incentive to do a deal, almost regardless of the homebuyers' ability to repay; the buyer hoping for a quick profit, the real-estate agent and mortgage broker hoping for a fee. And the banks did not need to be as concerned about creditworthiness as they used to be, given they would be quickly selling the loan.
Many homeowners are already in trouble. Figures from MacroMavens, an economic consultancy, suggest that 23% of adjustable-rate mortgages, covering loans with a value of $693 billion, are already in negative equity, where the loan is worth more than the property. But the full impact of defaults may not be felt until the low “teaser” rates on mortgages expire and push up borrowing costs. These teaser loans were done on a “two and 28” basis (with low rates applying for the first two years, and higher rates for the next 28). So the worst news from the 2006 vintage may not be felt until 2008.
Nor does default necessarily mean the end of the road. Few lenders want to foreclose, a process that takes ages, incurs massive costs and often causes the departing residents to trash the house. It is better to agree on a quick sale. But too much selling will force prices lower, weakening the rest of the portfolio. 
> Much more details and a bigger version at 
Some people try to spin the recent M&A number and point out that the average premium paid is stilll far below the peak in 1999 and implying that there is still more to come. Sounds desperate to me. As i´ve written above AOL and others have paid with almost worthless paper/stocks. I can remember a deal from JSDU that bought SDLI with a huge premium for over $35 billion. No wonder that premiums were high......
Here comes the real story! This graph show the purchase price (including debt) on a cash flow basis (ebitda). This parameter is hitting new historic highs! The fact that at the same time margins are also at all time highs makes this number even more worrysome.....We will see down the road how many of the recent deals were/are "smart" deals. But one thing is for sure....the deals are not cheap!
Who Cares? Part I
In a poll last week asking, "In general, are you satisfied or dissatisfied with the way things are going in the U.S. at this time?" a whopping 74% reported dissatisfaction, while only 24% reported satisfaction.
The Bank for International Settlements is warning that years of loose monetary policy have fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump is than generally understood, the U.K.'s Telegraph newspaper reported on its website. Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s.
In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", the bank was quoted as saying. The BIS, the ultimate bank of central bankers, pointed to multiple worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system, the report said
It sure is with regard to how much U.S commercial banks are providing of late. Adjusted by the CPI, the year-over-year change in U.S. total bank credit (loans and investments) hit a recent peak of about 9% in October 2006. 
As of May, that year-over-change had slowed to about 4.8% (see Chart). As mortgage defaults continue to rise and regulators issue new more restrictive mortgage lending "guidelines," bank credit growth is likely to slow still more.
....More than in any previous cycle, a sophisticated assembly line has developed to facilitate the creation of credit and expansion of leverage. The days of the neighborhood banker on a first name basis with his customer are long gone. Loans are now originated, packaged into securities by Wall Street, endorsed by insurance companies and ratings agencies, and sold to investors. The assumption is that each of the gatekeepers is unbiased and financially sound. Yet commercial banks such as Citigroup have assets-to-equity of 12 times, investment banks are typically levered 25-to-1, and bond insurers like Ambac and MBIA guarantee 80 to 90 times their capital. If a chain is only as strong as its weakest link, there is plenty that could go wrong with the great intermediation of credit creation.
Investment banks have reveled in an elevated role during this credit cycle. In the past six years, the Fed grew its balance sheet 50%, money supply expanded 60%, and the Top Five investments banks increased total assets by 160%......
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