EU needs to kick start their worst economies by recapitalising banks

EU needs to kick start their worst economies by recapitalising banks


Austerity measures bites but there is no shortcut to solve EU’s problems. Timing is the issue, after the economy is on the road to recovery, there is a need to recapitalise banks to provide much needed funds for SMEs to create jobs via micro-finance. The funds provided can be recovered by diluting the shares of state banks to private investors, and EU/IMF must continue to monitor and make sure there is an orderly exit to provide confidence to the markets. Once the ball is rolling, the creation of wealth will ensure there is ROI to make sure private investors stay vested. Every single one of those economies need a different solution, and the greatest headache is Greece, which is more difficult to fix once it gets out of the Euro, but politicians do not intend to solve the problems, they want an easy way out, which is dangerous when voters get light headed and do not think of the consequences, they just want money to drop down from heaven. An orderly exit might reduce Greece’s chances of repaying it’s debts, it might also cause a longer period of hardship as everything gets devalued in Greece, but it does not mean that Greece will not be able to pay it’s debts in future once the global economy recovers. So political will is needed, or you will see chaos once more than half the population of Greece lose their jobs and will have to depend on welfare, where there is none. It is the choice of the people, who has already casted their votes, but who in the right mind will chose such hardship?
That is the reason why the independence of the UN is very important to solve the global crisis as and when it surfaces, thru my innovations and technologies, UN can be internally funded by the World Bank and IMF, the contributions from members is important, but it will really give UN the resources to fight any crisis it needs, without complications from its own members, UN could therefore technically ‘print it’s own money’ far greater than the FEDs, without a worry of inflation or a drop in value in it’s money, or rely on it’s member states to supply it denominated currencies like US$, Euro$ or RMB$. But it doesn’t mean every member states will be given a blank check to do as it pleases, prudent financial management needs to give transparency and accountability to all.
– Contributed by Oogle. 
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AFP
Sunday, May 13, 2012

BRUSSELS – The European Commission on Sunday welcomed a Spanish move that forces strapped banks to establish a new 30 billion euro (S$60 billion) loan cushion and rid their accounts of risky property assets.
“I welcome the measures announced on Friday by the Spanish authorities to further reform the banking sector,” said EU economy commissioner Olli Rehn.
“A prompt and profound reform of the banking sector is a cornerstone of Spain’s crisis response and its overall reform strategy.”
Rehn said the banking reform measure was a crucial addition to Madrid’s efforts at consolidating its budget and implementing structural reforms aimed at laying a foundation for sustainable growth and job creation.
Rehn also voiced hope that the move would help Spanish banks regain the confidence of financial markets and institutional investors.
Prime Minister Mariano Rajoy’s government took the dramatic step Friday, two days after it nationalised the fourth-biggest Spanish bank, Bankia, to salvage a balance sheet drenched in red ink.
Madrid will charge two independent auditing firms with valuing banks’ exposure to the collapsed property sector, which is still reeling from a housing bubble that popped in 2008, ministers said.
Banks have already been told to set aside 53.8 billion euros as a buffer against expected losses from real-estate loans on which borrowers are likely to default.
While the banks have been tasked with finding the money, a Spanish public aid fund might lend them some of it in exchange for stakes in institutions that have to ask for help, Spanish authorities have indicated.
That prospect drove Spanish stock market prices lower on Friday because investors expect Madrid to have to intervene again in favour of the banks. The Bankia operation was the eighth such move since 2008.
Bank of Spain figures show that commercial banks held problematic real estate assets, including loans and seized property, worth 184 billion euros, equal to 60 percent of their property portfolio at the end of 2011.
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Spain’s greatest headache is the collapse of it’s real estate, making banks very vulnerable to exposure of risks but now that reforms has been in place, Spain will follow the recovery like in the US of Freddie Mae where investors will return back to buy real estate, as that is a very good hedge against inflation, once the global economic recovery is stable, Spain will be the first to get out of the red out of the worst four from EU. EU can afford to bail out it’s worst with some help from World Bank and IMF, but if the governments cannot afford reforms and austerity measures, who will take the risks when everything falters again?
– Contributed by Oogle. 

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Our Missing Billions ; There is no accountability in our CPF, every Singaporean already knows

In our last post, I gave a short and a long answer to questions about the importance of who owns the debt. The short answer is that it doesn’t matter who the government of Singapore owes money to, it still owes money to them.  Some readers and posters said that if the Central Provident Fund (Singaporean social security) owns the debt issued by the Singaporean government, then it doesn’t really matter.  Let’s examine that question in greater detail.
The CPF collects mandatory contributions from Singaporean citizens and pays a statutory rate of return to its account holders currently ranging from 2.5% to 4% depending on the type of account.  The contributions are intended to be used for old age income support and health care among other basic services.  The CPF holds $185 billion SGD of investment assets under management but also $185 billion SGD in liabilities in the form of member accounts with a net surplus $1.9 billion.  In other words, there is only a small amount of net assets under management at the CPF.
According to CPF financial statements, 95% of CPF investment assets are “special issues of Singapore Government securities”.  In other words, the CPF is the primary purchaser of the debt issued by the government of Singapore.
The CPF is then part of a large circle that takes money from the citizens pays them interest and lends it to the government Singapore matching the interests rates between the two rather closely.  This leads to three important and inescapable conclusions:
1.  The CPF has minimal net assets under management and cannot really add to our search for missing assets.  In other words, the CPF cannot add to our understanding of where we might find large amounts of net public assets.
2.  Singaporean citizens have provided enormous free cash flow to the Singaporean government in the form of structural budget surpluses and large amounts of lending. As I said in the last post, from 1991 to 2010 alone the sum of budget surpluses and net lending totaled $512 billion SGD.
3.  All roads still lead to the Singaporean government. The enormous volume of free cash flow in the form of budget surpluses and increased borrowing flowed through Singaporean government finances and was under their management.
Returning to the question I posed in the previous post, if the Singaporean government enjoyed free cash flow from budget surpluses and borrowing totaling $512 billion SGD between 1991 and 2002, where did the money go?
To be clear there is no public record of expenditures by the Singaporean government to account for the $512 billion SGD in free cash flow since 1991. Nor is there as public record of assets held by Temasek, GIC,  or other public body in large enough amount to account for such a large discrepancy. Remember if this $512 billion earned the 7% GIC claims to have earned there should be more than $1 trillion in assets.
The reason the CPF matters and should concern Singaporeans is simple.  The government of Singapore is borrowing money from its citizens through the CPF payed 2.5-4% and investing that money in other assets through GIC and Temasek hoping to earn a higher return. Publicly, GIC and Temasek claimed to have earned 7% and 17% since inception meaning they are earning a comfortable spread above the 2.5-4% they must pay for those funds. If Temasek and GIC earn less than the 2.5-4% they pay to the CPF, the government must essentially subsidize the losses to keep the CPF whole.
According to the data published by Temasek and the best estimates of GIC, they hold around $500 billion SGD essentially matching the $512 billion SGD in budget surpluses and increased borrowing or a total return of about 0%. This leads to two frightening conclusions:
1.  While estimated GIC and Temasek assets essentially produce a 0% nominal return, when factoring in inflation, this produces real investment losses of about 35%!!
2.  The government of Singapore has essentially been subsidizing GIC and Temasek losses by paying their implied obligations to the CPF even though the they have not earned a rate of return sufficient to cover the cost of debt capital. In other words, the government of Singapore is subsidizing GIC and Temasek losses to the amount of the rate of return earned by GIC or Temasek minus the 4% it pays to CPF account holders. Financial losses attributable to GIC and Temasek but covered by the government of Singapore, significantly increase the risk of CPF deposits.
There are two final points worth mentioning. First, we continue to search for enormous amounts of missing assets. For instance, it has been suggested that GIC and Temasek have not produced accurate accounts that would reconcile the difference.  Given that there is a minimum of $500 billion SGD in missing assets, I am very skeptical that this is simply due to sloppy accounting.  However, the fundamental point is to focus on locating in public records the missing assets.  There needs to be a bare minimum of $500 billion SGD in unreported assets to begin to bridge the gap between what exists and what should exist.
Second, due to the length of this post, I only covered the CPF today and could not cover the Monetary Authority of Singapore and its foreign reserves.  In the next post on Monday, I will analyze the MAS.  Needless to say, it doesn’t in anyway change the analysis.
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Christopher Balding
*The writer is a professor of business and economics at the HSBC Business School at the Peking University Graduate School.  An expert in sovereign wealth funds, he has published in such leading journals as the Review of International Economics, the Journal of Public Economic Theory, and the International Finance Review on such diverse topics as CDS pricing, the WTO, and the economics of adoption and abortion.  His work as been cited by a variety of media outlets including the Wall Street Journal and the Financial Times
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Come 2016, when PAP loses the elections, when our CPF board is unable to repay it’s obligations to it’s CPF members, everything will be exposed, but I have already prepared for such a possibility, everything has been hidden from the public for so long, it will be an attempt to blackmail every Singaporean to vote PAP again, or there will no longer be a retirement fund.
Don’t be too happy if you can squeeze goodies from the government, you may end up paying the price from your retirement funds in future, if I am not wrong, the damage over the years could total as high as S$300 Billions, and there is no way the government can recover this money.
When I get to the UN and change the concept of Swiss Bank accounts no longer private, the UN and other governments will have all access to once secret accounts, we will definitely see the whole picture.
– Contributed by Oogle.