russiangambit (99.02)

Russia spoils the party

June 25, 2009 – Comments (3) | RELATED TICKERS: RSX

I was rather amazed that the market rallied today in the face of pretty bad news  - higher unemployement again, lower as expected home sales. I realize that the market now looks only at the treasury auctions, which went ok this week (but realize that this is no free money, the only good news here is that somebody is still giving us money) . Then FED came out and said things are improving ( but who still believes the FED?). So, I guess everybody decided that the worst is behind us, financial crisis is over and we are ready for the next rally.

Russia, however, is just now discussing banks nationalization since things are still deteriorating dangerously. That should remind everybody that US banks are really not in much better shapre, they are just hiding their losses, but the losses are still there and they are getting bigger as unemployement increses and housing doesn't imporve

From Financial Times today:

By Catherine Belton in Moscow

Published: June 25 2009 18:04 | Last updated: June 25 2009 18:04

Russia is considering a banking bail-out that will go further than measures taken by the US, as fears grow that bad loans could paralyse the economy.

Igor Shuvalov, deputy prime minister, will consider taking stakes in troubled banks when a group of experts on the crisis meets on Friday to discuss ways to recapitalise the country’s banking system, according to a draft proposals seen by the Financial Times.

Analysts said such a plan could allow banks to declare the true level of bad loans on their balance sheets, which, once cleaned up under the programme, would break the credit squeeze and allow them to start lending again in 2010.

The proposal, one of several under consideration, would see the government issue OFZ treasury bills, a type of bond, to boost the balance sheets of the biggest banks. In return the state would get preferred shares. Unlike the US bank bail-out, the Russian scheme would see the government take board seats and get veto rights at the banks it bails out.

About $100bn (€72bn, £61bn) in domestic loans fall due by the end of the year and the central bank has said banks’ profits would be totally wiped out if non-performing loans hit 10 to 12 per cent. Standard & Poor’s warned last week problem loans could reach as high as 38 per cent.

With inflation, high interest rates, a dearth of new credit and a sharp fall in commodity prices still squeezing companies, bankers say they fear non-performing loans could hit as much as 20 per cent of overall credit portfolios by the end of the year.

International ratings agencies Moodys and S&P have warned that Russia could need to spend as much as $40bn recapitalising the banking system by the end of the year.

Under the draft bill being considered on Friday the prefs would be convertible into ordinary shares in 10 years’ time should the bank be unable to pay back the bond when it matures in 2019. The recapitalisation funds would be limited to the top 55 banks in Russia’s 1,100-strong banking system, analysts said. The draft bill says only banks with a minimum of Rbs50bn ($1.6bn, €1.4bn, £1.0bn) in assets would be eligible.

People familiar with the discussions said other factions were still pressing for an alternative “bad bank” to be created. The government may not make a final decision until the autumn. 

Natalya Orlova, chief economist at Alfa Bank in Moscow, said she feared the government could drag its heels on a plan and allow banks to avoid disclosing non-performing loans in hopes the economy would later improve.

The Central Bank has already eased disclosure rules on non-performing loans once this year. But lack of transparency over the depth of the bad loan problem has already added to market volatility – the stock market fell as much as 20 per cent this month after more than doubling this year – and exacerbated a credit squeeze that is likely to help wipe more than 7 per cent off the economy this year.

If the government continues to delay, “this means that many banks will just stop operations. They will continue to exist but they won’t be able to provide new loans,” Ms Orlova said.

The government fears it could spend its entire Rbs4,000bn reserve fund and more, once it begins to recapitalise the private banking sector, she added.

But Yevgeny Gavrilen­kov, chief economist at Troika Dialog, the Moscow investment bank, said it would be best if the government did not attempt to interfere in the problem but concentrated on lowering inflation instead.