•Defaults on public debts are pretty mundane events; and
•Greece is historically the world’s leading serious defaulter.
What makes the coming event interesting is that it will be the first time that a default occurs within a monetary union.
The crucial observation is that there is no automatic link between a default and monetary-union membership. As we know from previous experiments of government default within the dollar monetary union – the defaults of Orange County in California and Detroit in Michigan – a sub-central government can default and keep the currency. The unique characteristics of such events are that: 1) an exchange-rate depreciation cannot help shift expenditure to the defaulting region’s production; and 2) there is no local central bank to provide liquidity to both the government and commercial banks during the hard phase of the default.
The Greek government might be tempted to recover its own currency but the short-run costs are likely to far exceed the short-run benefits, as explained by Eichengreen (2010). An idea of what would await Greece is provided by Levy Yeyati (2011) in his description of how Argentina gave up its currency board link to the US dollar, an easier case given that the national currency was already in place. The Argentinian example should warn the Greek authorities of the political turmoil that could follow a default.
In the longer run, however, a much-depreciated drachma could lift the Greek economy and, of course, the country might appreciate monetary independence following its wrenching experience inside the Eurozone.
Basically, the trade-off is a major shock and one more year of misery versus the removal of Eurozone membership shackles forever. The balance of benefits is difficult to evaluate since it depends very much on institutional issues that are not clear now. The key questions are:
•Will Greece be able to finally establish on its own fiscal discipline and will its central bank deliver high-quality monetary policy?
•Will the Eurozone draw all the lessons from a Grexit and amend its policies and governance?
In the short run, after a first default, even a partial one, the Greek government will have to balance its books because no one will lend anything any more. ‘Balancing the books’ can mean different things, however.
•One option is to run an overall balanced budget, thus continuing to service the debt after the initial wave of defaults.
Recent forecasts for 2015 are for a deficit of 3.5% of GDP, an improbably huge improvement over last year’s 12.3% deficit.
•Another option is to balance the primary budget, which means no servicing of the debt.
The primary budget was just about balanced in 2014. With growth returning to the Eurozone in 2015 and with the end of the fiscal contraction of recent years, this is within reach if the government refrains from many of its electoral promises.
A balanced primary budget would shield the government from external pressure but the size of defaults will grow. It is argued that various debt restructurings have lengthened the average maturity to more than 15 years and provide a ten-year grace period on capital repayment, and even interest service to the European Financial Stability Facility (Darvas 2015). Yet, debt service remains non-negligible, especially for the rest of the year, with a debt service estimated at some $20 billion (8.5% of GDP). It will decline somewhat over the next few years, but not significantly.
Somehow, a debt restructuring, long overdue, will have to follow. There is nothing new here.1 More novel is how a sovereign default can be handled within the Eurozone.
Sovereign default within the Eurozone?
Under normal conditions, a country whose government is in default but needs no financing, can remain within the monetary union. Current account deficits, if they exist, represent private borrowing. They are entirely financed, otherwise they would not occur. In the case of Greece, a number of things must happen for it to prosper in the longer run, but there is no immediate macroeconomic pressure that would jeopardise Eurozone membership.
Conditions are not normal, however, and a default would aggravate an already dicey situation.
Many people seem to equate default and Grexit. This is an instance of a self-fulfilling prophecy. If the Greek citizens believe that this is indeed the case, they will not want to keep their savings in Greek financial institutions. In fact, they are already moving them. Since December 2014, when the coming election outcome became obvious, according to various estimates, they have withdrawn about a fifth of their bank account balances. A default would likely trigger a full-blown run on already enfeebled Greek banks.
There is not much debate on how to deal with a bank run.
•First, short of declaring a crippling long-lasting bank holiday, bank withdrawals must be limited, which may, or may not, require controls on capital outflows.
•Second, the authorities must move to urgently stabilise the banking system.
This may involve urgent large-scale lending to solvent banks, and the takeover of insolvent banks.
In such a situation, determining bank solvency is more art than science, so value judgement is unavoidable. But who are the authorities? The defaulting government and the central bank. Either the government receives emergency funding, which is likely to be ruled out, or the central bank must foot the bill entirely on its own. That effectively means the ECB. As De Grauwe (2011) convincingly argued, the sovereign debt crisis only occurred because the euro was a foreign currency to Eurozone member countries.
•If, in the face of a bank run, the ECB does not act as lender of last resort, the Greek government will have no choice but to leave the euro under the most unfavourable of all circumstances.
Since the onset of the slow-motion bank run, the ECB has dithered. Its instrument, the Emergency Liquidity Assistance facility, leaves quite some discretion in the hands of the central bank. It has a ceiling, which it has raised repeatedly. It must list what is acceptable collateral, and the list has been repeatedly expanded. Since much of the collateral of Greek banks is soon-to-be-defaulted-upon Greek government debt, it is understandable that the ECB proceeds with caution.
•Once, following a default, a bank run is under way, in principle Greek bonds will not be acceptable to ECB; with no central bank able to act as lender of last resort, the Grexit prophecy will have become reality.
What this all means is that, if the aim is to avoid a Grexit, it is not possible to wait for a default to happen.
Avoiding Grexit means avoiding default or lining up a lender-of-last-resort
The vicious cycle that underpins the self-fulfilling prophecy must be broken now. That means ruling out either the first or the last step of the cycle.
•The way to avoid the first step, default, is to announce an agreement in principle to reduce the public debt of the Greek government.
•The way to avoid the last step, Grexit, is to announce that resources to thwart a bank run are available.
These announcements must be unconditional – independent of an agreement on the assistance programme – because it seems that such an agreement is beyond reach.
Concluding remarks
The problem is that European authorities are bound to find it politically impossible to give in, ditch the pre-existing agreement and abandon conditionality. Economically, they also face a conflict of interest. About 80% of the Greek debt is now owed to officials, the European authorities and the IMF. The official rhetoric is that “we have done enough for Greece”.
So far, however, the Europeans have not made any present to Greece,2 only loans, initially on harsh financial conditions, then sweetened. A default would turn the loans into presents. Making it possible for Greece to comfortably default does not seem appealing at all.
National governments are elected by their citizens so they are most unlikely to act to prevent a Grexit. One more time, we have to turn to the ECB, whose essential mandate is to uphold the Eurozone.
It may be unfair, but the ECB’s duty is to announce very soon that it will do whatever it takes to keep the Eurozone whole.
Early premarket gappers
Gapping up: SYMX +71.3%, CPRX +5.7%, NBG +5.7%, SNP +5.6%, PTR +5%, PWRD +3.5%, ACHN +3%, HSBC +2.8%, NVO +2.6%, GWPH +2.4%, NEM +2%, ASML +1.9%, SAP +1.5%, GDX +1.2%, RCL +1.2%, STM +1.2%, PHG +1.1%, TOT +1.1%, CCL +1%
Gapping down: AMAT -6.9%, DB -4%, MRVL -3.2%, DDD -2.9%, VALE -2.8%, IBN -2.6%, SDRL -1.7%, BHP -1.6%, SSYS -1%, BP -1%, AIXG -1%, PRGO -1%, RIO -0.8%
Gapping down: AMAT -6.9%, DB -4%, MRVL -3.2%, DDD -2.9%, VALE -2.8%, IBN -2.6%, SDRL -1.7%, BHP -1.6%, SSYS -1%, BP -1%, AIXG -1%, PRGO -1%, RIO -0.8%
GROUPAMA
GROUPAMA devrait concrétiser son rapprochement avec CNP en septembre. Les dirigeants des deux groupes auraient réussi à s'entendre sur les modalités. L'assureur mutualiste vise à renforcer ainsi sa position sur le marché de l'assurance de la personne.
VIVENDI : SES NOUVELLES CIBLES
Le groupe de médias compte désormais accélérer sur son programme d'acquisitions, après que Vincent Bolloré, qui préside son conseil de surveillance, a assis son contrôle lors de l'assemblée générale mi-avril. Ayant décliné le dossier du bouquet Sky, Vivendi regarderait activement celui du rachat de Mediaset, holding de Silvio Berlusconi. Ce dernier serait en effet intéressé par un recentrage sur l'édition et la presse au travers de son groupe Mondadori. Vincent Bolloré, très impliqué dans les affaires transalpines, pourrait ainsi accroître la présence en Europe de Canal+ tout en sortant du seul marché de la télévision payante. Vivendi étudierait aussi une prise de contrôle d'EuropaCorp, société de production et de distribution de Luc Besson (Lucy).Bolloré présentera ses cibles lors du conseil de surveillance du 12 mai.
*FRICKE SAYS ‘THERE WILL BE A PLAN B’ FOR GREECE
*VIVENDI STUDYING EUROPACORP, MEDIASET PURCHASES: L'EXPANSIO
if I i was long I will take some profit here, if no position worth a short...this article look so bad...
Wirecard is a little known German tech stock worth €5bn, and a puzzle. It offers payment services, owns a Munich bank, and transacts millions of online credit card payments behind the scenes at familiar websites. It grows at breakneck pace, but buys obscure payment companies around the world which keep the growth going.
Enthusiastic investors have given Wirecard half a billion euros to spend, and the company used much of it to buy customers, so-called portfolios of relationships, piling almost all the cash its business has produced since 2009 into these customer relationships.
The puzzle is an accumulation of questions: why does the company pay big sums upfront, months before deals complete? Why are key parts of transactions not fully transparent? Why spend millions on struggling Asian businesses? Why do accounts filed in Singapore not match totals reported in Germany? What are €670m of intangibles on the balance sheet really worth?
Cash up-front
Consider the pre-payments. Before October 2010 Wirecard had announced smaller deals, and it has done so since, but that month the company made no mention of a €13m “pre-payment”. The sum was only recorded in notes to the annual report, and again in a table published two years later reclassifying €13m as “customer relationships”.
The company told us the prepayment was part of a deal announced 14 months later, in December 2011, to buy Singapore payments group Systems@Work. The pre-payment was not disclosed at the time, for a transaction described as comprising €34m in cash, €13m in future “earn-out” payments, and the assumption of €12m of liabilities.
Wirecard says pre-payments secure the exclusive right to negotiate, and they are a feature of its Asian deals. For the December 2012 purchase of Trans Infotech, a provider of payment services for banks in Vietnam, Cambodia and Laos, it paid €17m of the €21m price in advance. Buying PT Aprisma Indonesia for €73m (including assumed debt, but before €15m of earn-outs) last year, Wirecard paid €26m months before closing.
“I don’t know of any clients who would pay a substantial amount of the purchase price at signing, or to get exclusivity. That’s not a feature I saw in Asian deals”, said one veteran M&A lawyer who declined to speak on the record. “It is not completely unheard of for a company to ask for a 5 per cent deposit, which ends up becoming a break fee, but it’s kind of rare for buyers who are well known to agree to it.”
Mr Braun said “we don’t see this really as a pre-payment or a down-payment”. He said money either goes into escrow, or the company takes assets to keep if a full deal falls through. “Its just a very smart way to structure M&A”.
Gary McLean, Corporate Partner at Allen & Overy, said that sometimes in Asian deals full payment might be placed in escrow, to show the money is fully available, or to appear as an attractive purchaser versus other buyers. “More often you would get between 5 per cent to 20 per cent in escrow, as a tangible token of good faith and evidence of creditworthiness”. However he said it would be unusual for a large listed company to do so, but particularly rare to give sellers use of cash before the buyer takes control of the target assets. “That’s relatively unusual, because the creditworthiness of the listed buyer should not be a concern if it is an escrow payment, and if you allow use of the purchase consideration itself in the interim period it is akin to a loan”.
A portfolio here, a portfolio there
The structure of some Wirecard transactions is also unusual, with purchases of portfolios of customer relationships disclosed only in Singapore corporate filings. For instance, the €12m of Systems@Work debt was a loan from Wirecard made after the deal was announced “for the acquisition of intangible assets from a third party”, according to the local accounts.
No debt was mentioned in the announcement of the €21m Trans Infotech deal. Yet Singapore filings show on the day it was announced Trans Infotech used the proceeds of a promissory note to buy “a portfolio of customer relationships with certain merchants” for €16.7m. Perhaps unusual for a Singapore business, the consideration was in euros.
Mr Braun says “At such owner led companies… sometimes you have to buy out third party shareholders, or you have to take over assets of sister companies. This is then part of the purchase price”. Wirecard said the loan to Systems@Work was agreed before the deal was announced, and the structure of the Trans Infotech deal reflected an “owner driver heterogenous group”.
Customer lists and intangible values
When Wirecard buys a company, it must record the investment on its balance sheet. Most of the value is typically ascribed to “customer relationships” an accounting convention to reflect the value of repeat customer business, an alternative to the intangible catchall “goodwill”. In one sense it’s an accountant’s shrug, to note where money went.
Yet Wirecard treats customer relationships as real assets. It has a transaction based business model, so says buying customers is a way to sell more payment services. In 2006 it paid €18m for a portfolio of customer relationships, then gave another €17m to the unnamed sellers a year later, saying profits were larger than expected. Occasional purchases of a similar size continued: it told the Financial Times a €15m pre-payment at the time of the Trans Infotech deal was for the purchase of customer relationships from a “sales partner”, completed a year later.
The growth in such customer relationships has been considerable, from €49m in 2009, when the company started to buy-up Asian payments companies to €340m at the end of last year. Investment in these customers, would have accounted for almost all of the cash generated by Wirecard’s operations over the period, however the company raised €139m from shareholders in 2012, and a further €357m at the start of last year.
Volkswagen more likely to spin off truck operations after chairman's resignation
Volkswagen, the German auto giant, may be closer to spinning off and listing its truck operations, Dagens Industri reported, without citing any specific sources. This is after the weekend's news that VW's Chairman Ferdinand Piech has resigned.
The Swedish business daily reported that Piech played a significant role in VW's investments in Swedish truck manufacturer Scania and German MAN and that many VW shareholders would have preferred to use the funds for strengthening VW's market share within cars instead.
The paper wrote that Riech's resignation puts VW's ownership of the truck operations into focus and speculated that a separate listing of the trucking unit seems likely. The paper noted that listing the trucking unit would allow VW CEO Martin Winterkorn to concentrate on the company's automobile operations and could financially facilitate VW Trucks' expansion in the North American market.
The original article appeared in print; Page 6
Source Dagens Industri
Nord Gold seeks premium listing on LSE, increasing free float to over 30%
Nord Gold N.V. (“Nordgold” or the “Company”, LSE: NORD), the internationally diversified low-cost gold producer, is hosting an Investor Day for sell-side analysts and institutional investors today (27 April 2015).
David Morgan (Chairman), Nikolai Zelenski (CEO), Louw Smith (COO), Oleg Pelevin (Director of Strategy and Corporate Development), Igor Klimanov (Development Projects Director) and other members of the senior management team will be presenting.
The presentations will focus on Nordgold’s positioning, strategy, operations, growth projects and outlook.
Strategic update and intention to seek premium listing
Since it was established in 2007, Nordgold has evolved from a high growth emerging markets gold company to a best in class internationally diversified low-cost million ounce gold producer. Nordgold has established a reputation for financial delivery and operational excellence, illustrated by the highly successful launch of Bissa, Nordgold’s second mine in Burkina Faso and achieving positive free cash flow at all nine mine sites in 2014.
In order to drive shareholder value, Nordgold plans to continue to deliver on its strategic initiatives, designed to achieve production and profit growth in a low price environment:
• Excellency in operational and financial performance through maintaining the high quality of the Company’s mines and tight control over costs.
• Robust free cash flow generation.
• Consistent shareholder returns through a quarterly interim dividend payment of 30% of normalised net profit attributable to shareholders and the buyback programme, started in February 2015.
• Reduce the debt position organically through consistent free cash flow generation and effective debt management.
• Develop the existing pipeline of high quality greenfield and brownfield projects through carefully selected investments.
The Board has also approved further capital markets strategic initiatives to increase the Company’s market capitalisation and position it for market success, including the aim of seeking a premium listing on the London Stock Exchange, increasing the free float to over 30%.
Nikolai Zelenski, Chief Executive Officer of Nordgold, commented:
I am delighted to host our first Investor day in London, a symbol of our continued commitment to corporate governance and transparency. Nordgold has a track record of financial and operational performance, which is not reflected in the current market value of the business. We firmly believe our intention to seek a premium listing will materially improve the valuation of the business and positively impact the returns we can generate for our shareholders.