Deposit bail-in risks are slowly being realised in Ireland, after it emerged overnight that FBD, one of Ireland's largest insurance companies, have been moving cash out of Irish bank deposits and into bonds.
Revelations regarding deposit bail-in risks came in the wake of warnings of a new property crash centred on the housing market in Ireland. The former deputy governor of the Central Bank warned in an op-ed in a leading international financial publication, Project Syndicate, that Ireland is at risk of another housing market crash.
Insurer FBD has moved over €150 million out of the Irish banking system and into corporate and sovereign bonds over the past year. The move was prompted by low returns offered by bank deposits and the risks that deposit bail-in rules could see deposits confiscated.
FBD chief executive Fiona Muldoon told the Irish Independent that the "extremely low returns offered on term deposits by banks, coupled with fears that new bail-in rules introduced this year by the European Union could expose bank bondholders and depositors to bailing out a failed lender, meant it has shifted investments away from banks."
The new deposit bail-in mechanism is designed to protect banks and is touted as a way to prevent taxpayers being liable for bailing out collapsed lenders. It is believed that it leaves bank bondholders and deposit customers with more than €100,000 on deposit at risk of footing the bill.
There is a belief that bail-ins only relate to “the wealthy” and "rich" depositors as they will be imposed on those with deposits greater than national deposit guarantees. These deposit “guarantees” are generally the ‘big round’, arbitrary number of say €100,000, $250,000 and £75,000. These are not particularly large amounts and could amount to the entire life savings of a pensioner, a family or indeed it could be the entire capital of a small to medium size business enterprise.
An example of this is the UK where the deposit guarantee was arbitrarily, suddenly and with little fanfare quietly reduced from £100,000 to £75,000 just last year in July 2015.
Thus, it is important to note that the arbitrary round number in the various government deposit guarantees can be, and probably will be, reduced to a lower number – say the new round number of €50,000, £50,000 and $50,000 - depending on the severity of the next banking crash.
In the event of bail-ins, governments and banks are likely to seek to impose deeper haircuts on creditors including depositors in order to bail-out and protect the failing banking system.
FBD's deposits with Irish banks were reduced from €451 million to €305 million in recent months. FBD made a €3.1m loss in the first half of the year.
As reported by the Irish Independent:
"As they mature, and as the bank bail-in rules come into play, it's no longer the case that for corporate investors depositing at a bank is risk free," she added. "To be honest, the return is abysmal now. We've gone back to a more typical investment portfolio for an insurance company."
"You have to be paid for the risk you take," she added. "You might entertain the bail-in risk if you were being properly paid. But if you've a bank trying to charge you for leaving your money with them, you're not inclined to take any risk at all."
Meanwhile, the risk of another property crash centred on the housing market has been warned of by a respected economist. Stefan Gerlach, who left the Central Bank of Ireland earlier this year to become Chief Economist at BSI Bank in Zurich, asked:
"Having endured the collapse of its housing market less than a decade ago, Ireland has lately been experiencing a blistering recovery in prices, which already have risen in Dublin by some 50% from the trough in 2010, is Ireland setting itself up for another devastating crash?”
Among the concerns he expresses in an article titled 'The Return of Ireland’s Housing Bubble' for the global finance think-tank Project Syndicate is that the Central Bank here is coming under undue pressure from the construction industry and politicians to relax the loan to value and loan to income ratios on mortgage lending it introduced last year.
He warns that while housing bubbles are easy to spot, there are a number of conflicts of interest that make it hard to take action as the market gets out of control as reported by Newstalk:
"The obvious question is why nobody stepped in before it was too late. The answer is simple: while the bubbles are inflating, many people benefit. With the construction sector thriving, unemployment falling, and banks lending freely, people are happy – and politicians like it that way."
"Many in Ireland might find that conclusion overly pessimistic. Maybe they are simply hoping that, this time, the luck of the Irish will hold. Perhaps it will, and this time really is different. But there isn’t much evidence of that," he concludes.
The 'Bail-in regime' is one of the greatest financial risks to investors, savers and indeed companies internationally today. Yet it remains the most poorly covered financial risk and is largely ignored by financial advisers, brokers and not surprisingly governments and banks.
The growing financial risk in all western countries has not been properly analysed. In a world already beset with huge deflationary pressures and still insolvent banks, the bail-in regime and confiscating deposits, especially from job creating companies, would be extremely deflationary and would likely contribute to severe recessions.
This is something we warned of when we first conducted our extensive research on the developing global bail-in regimes after the Cyprus bail-ins in 2013. Diversification of deposits remains vital and one important way to protect against a bail-in is owning physical gold. Taking delivery of gold coins and bars and owning bullion in allocated and segregated storage in the safest vaults in the world is a prudent way to protect against the deposit bail-in regime.
Forex is the largest market in the world and the most widely misunderstood. For this reason we wrote Splitting Pennies - Understanding Forex - to educate and entertain. As we explain in the book, in Forex there's things which are possible simply not possible in other markets. For example, Forex trades all day and all night during the week. There's no waiting for 9:30 am 'market open' - and while even Forex is closed on the weekends, some brokers offer the ability to trade on the weekends, with a wider spread. Forex markets offer higher leverage, and unique features such as 'swap' payments, meaning that you are paid to hold positions (or pay, depending on the currency pair and your side of the market, long or short). Because of the nature of how the Forex market trades, there's a number of strategies that can work on Forex markets that simply can't work on other markets such as stocks, commodities, or bonds.
In Forex it's possible to have a simple linear progression account (function, as equity). Take this chart as example, it's a real live account statement from the past 3.5 years at a European broker:
Such equity curves simply aren't possible in other markets, without having some kind of advantage (such as HFT). If we saw equity curve's from prop shops they'd probably look like this.
How is this possible in FX, and not in other markets?
In Forex there's a number of strategies that are possible that just don't work in other markets. For example, let's take the strategy 'triangular arbitrage' - this is an arbitrage where there are price discrepancies between 3 currency pairs. Forex is traded in pairs, i.e. EUR/USD EUR/GBP EUR/CHF. What can happen during a big market event, for example a failed coup in Turkey as an extreme example, EUR/USD will move faster than it should have to keep in ratio with the rate of EUR/GBP. That can be just a market function, traders sell EUR/USD before EUR/GBP without algorithms. Or, large orders can cause the difference between EUR/USD and EUR/GBP to be off slightly. Even if only off by a fraction of a dollar, this can be millions in profits - hence the name of our book "Splitting Pennies."
How can you participate in it too
Well, the straight answer is that if you're a retail US investor, you probably can't. You can buy our book and understand why. But for the rest of the world, and ECP US Citizens, the strategy is offered as a managed account, as an investment. Investors open an account with the regulated broker based in London, United Kingdom with a minimum of $20,000 (doesn't matter, US Dollars, Euros, Great British Pounds..). Investors pay only for profits; there's no fees other than a performance fee of 30% calculated above a high watermark (it's not possible for paying fees to make back losses). The strategy has a live track record going back 3.5 years with no losing month. There was a 10% + drawdown during the 2015 Swiss Franc 'event' which was an excellent 'stress test' of the strategy; it recovered and continued to profit (no loss was booked during this event).
..your next step would be to be vetted as an ECP, and proceed to open account. But the minimum for you would be $1,000,000 - this is similar to the hedge fund account minimum of $1,000,000 - the idea being, outside of being vetted as an ECP, if you can open an account with 1m in cash, you're likely a qualified investor. Also, as the carrying broker is in the UK, you'll have to report this account on your FBAR, if you don't already have foreign accounts, this is another moving part that you'll have to have your team of advisors dig into. Many do it, but also many don't. In fact, many Americans don't even have passports, even rich Americans.
And frankly, if you are an ECP, you should receive a special status from the Treasury department - like the priority boarding on flights. All ECPs should be mailed lapel pins from the CFTC they can proudly wear over their Zegna "ECP." But, we live in a world where only the disabled, minorities, and other degenerates get special priviledges.
Forex as an investment
This strategy is by no means the only strategy in the world, there are many. The point is that many of these strategies can't be executed on other markets. Forex provides a unique market to develop such systems, that can produce linear progression equity curves. Strategies include statistical arbitrage, grid trading, latency arbitrage, triangular arbitrage, broker arbitrage, matrix trading, least squares trading, momentum oscillator trading, and countless others.
The Defense Department over the years has been notorious for its lax accounting practices. The Pentagon has never completed an audit of how they actually spend the trillions of dollars on wars, equipment, personnel, housing, healthcare and procurements.
An increasingly impatient Congress has demanded that the Army achieve “audit readiness” for the first time by Sept. 30, 2017, so that lawmakers can get a better handle on military spending. But Pentagon watchdogs think that may be mission impossible, and for good reason.
A Department of Defense inspector general’s report released last week offered a jaw-dropping insight into just how bad the military’s auditing system is.
The Defense Finance and Accounting Service, the behemoth Indianapolis-based agency that provides finance and accounting services for the Pentagon’s civilian and military members, could not provide adequate documentation for $6.5 trillion worth of year-end adjustments to Army general fund transactions and data.
The DFAS has the sole responsibility for paying all DOD military and personnel, retirees and annuitants, along with Pentagon contractors and vendors. The agency is also in charge of electronic government initiatives, including within the Executive Office of the President, the Department of Energy and the Departing of Veterans Affairs.
There’s nothing in the new IG’s report to suggest that anyone has misplaced or absconded with large sums of money. Rather, the agency has done an incompetent job of providing written authorization for every one of their transactions – so-called “journal vouchers” that provide serial numbers, transaction dates and the amount of the expenditure.
In short, the DFAS has lagged far behind in providing the tracking information essential to performing an accurate audit of Pentagon spending and obligations, according to the IG’s report.
“Army and Defense Finance and Accounting Service Indianapolis personnel did not adequately support $2.8 trillion in third quarter adjustments and $6.5 trillion in year-end adjustments made to Army General Fund data during FY 2015 financial statement compilation,” wrote Lorin T. Venable, the assistant inspector general for financial management and reporting. “We conducted this audit in accordance with generally accepted government auditing standards.”
A further mystery is what happened to thousands of documents that should be on file but aren’t. The IG study found that DFAS “did not document or support why the Defense Departmental Reporting System . . . removed at least 16,513 of 1.3 million records during Q3 FY 2015. As a result, the data used to prepare the FY 2015 AGF third quarter and year-end financial statements were unreliable and lacked an adequate audit trail,” the IG’s report stated.
The troubling findings emerged from a wide-ranging audit of the capital funds and financial statements across the military services, including the Navy, the Marine Corps and the Army.
The problem is no secret to investigative reporter Scot Paltrow at Reuters, who exposed outrageous fraud and abuse in a three-part series in 2013 called, “Unaccountable.”
“For two decades, the U.S. military has been unable to submit to an audit, flouting federal law and concealing waste and fraud totaling billions of dollars.
Linda Woodford spent the last 15 years of her career inserting phony numbers in the U.S. Department of Defense’s accounts.
Every month until she retired in 2011, she says, the day came when the Navy would start dumping numbers on the Cleveland, Ohio DFAS…. Using the data they received, Woodford and her fellow accountants there set about preparing monthly reports to square the Navy’s books with the U.S. Treasury’s…. And every month, they encountered the same problem. Numbers were missing. Numbers were clearly wrong. Numbers came with no explanation of how the money had been spent or which congressional appropriation it came from.”
The IG has cautioned in the past that journal voucher adjustments should comply with applicable regulations, which require adequate documentation for each transaction. The June 26 IG’s report made a number of requests and suggestions that DFAS officials and the Pentagon have agreed to go comply with.
The top suggestion is the most obvious one: that DFAS enforce “the applicable guidance” periodically issued by the Under Secretary of Defense Comptroller “regarding journal voucher category identification codes and metric reporting.”
“Until the Army and DFAS Indianapolis correct these control deficiencies, there is considerable risk that AGF financial statements will be materially misstated and the Army will not achieve audit readiness by the congressionally mandated deadline of September 30, 2017,” the report warned.
The unexpectedly sharp antagonism between Turkey and the west accelerated today, and one day after NATO preemptivelyreminded Turkey that it is still a NATO alliance member and advising Ankara that "Turkey’s NATO membership is not in question",Turkey had some more choice words for its military allies. Cited by Reuters, Turkey foreign minister Mevlut Cavusoglu told Turkish's NTV television on Thursday that the country "may seek other options outside NATO for defense industry cooperation, although its first option is always cooperation with its NATO allies." Translation: if Russia (and/or China) gives us a better "defensive" offer, we just may take it.
The sharply worded retort came on the same day that Turkey said it will resume airstrikes on Islamic State targets in Syria, and asked Russia to carry out joint operations against its “common enemy.” Ankara halted strikes after the downing of a Russian plane by Turkish forces last year.
In the same interview, Cavusolgu said that Ankara “will again, in an active manner, with its planes take part in operations” against Islamic State targets. Cavusolgu also said that Ankara has called on Moscow to carry out joint operations against the “common enemy” of IS. "Let's fight against the terrorist group together, so that we can clear it out as soon as possible,"Cavusolgu said, adding that otherwise IS will continue to expand and spread into other countries.
To be sure, coming from the nation which directly engaged in oil trade with the Islamic State, this is at least a little ironic, however, what is notable is the significant pivot Turkey has made vis-a-vis military engagements, rotating not toward the US alliance, but toward the Kremlin.
"We will discuss all the details. We have always called on Russia to carry out anti-Daesh [IS] operations together," he said, adding that the proposal is still "on the table." The foreign minister went on to tout the benefits of closer cooperation between Turkey and Russia.
"Many countries are engaged in Syria actively. There could be mistakes," he said. "In order to prevent that, we need to put into practice the solidarity and cooperation [mechanism] between us including sharing of real-time intelligence."
The comments came just days after Turkish President Erdogan visited St. Petersburg for talks with Russian President Vladimir Putin, in the first meeting between the two leaders since the plane was downed.
But perhaps the most notable development was reported today by Turkey's Gunes newspaper, which said that as part of the discussion between Putin and Erdogan on Tuesday, the Turkish president suggested to abandon the US dollar in bilateral trade between Turkey and Russia, and instead to transact directly in lira and rubles. This would "benefit both Russia and Turkey", Erdogan allegedly said in his August 9 meeting in St Petersburg, adding that this would relieve the lira from the USD's upward pressure. The reason Erdogan is concerned about exchange rates is because recently Turkish inflation soared by nearly 8% Y/Y, and the recent devaluation of the TRY against the USD has only poured more oil on the fire.
Needless to say, such a bilateral agreement would further infuriate Turkey's European "friends", permanently halting Turkish accession into the customs union, in accordance with Austria's recent demands, and would in turn lead to a dissolution of the refugee agreement that is still keeping millions in refugees away from Europe in general and Germany, and Merkel's plunging popularity ratings, in particular. Which, incidentally, means that not only Erdogan, but now also Putin, holds key leverage over the career of Europe's most important politician.
Moments ago, in what would be a very undemonic rate cut, the 667th since the Lehman bankruptcy, the Reserve Bank of New Zealand cut its Official Cash Rate by 25 bps to 2.0% in what was a widely expected move.
Statement by Reserve Bank Governor Graeme Wheeler:
The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.0 percent.
Global growth is below trend despite being supported by unprecedented levels of monetary stimulus. Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation. Some central banks have eased policy further since the June Monetary Policy Statement, and long-term interest rates are at record lows. The prospects for global growth and commodity prices remain uncertain. Political risks are also heightened.
Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate. The trade-weighted exchange rate is significantly higher than assumed in the June Statement. The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector. This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed.
Domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy. However, low dairy prices are depressing incomes in the dairy sector and reducing farm spending and investment. High net immigration is supporting strong growth in labour supply and limiting wage pressure.
House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability. The Bank is consulting on stronger macro-prudential measures that should help to mitigate financial system risks arising from the rapid escalation in house prices.
Headline inflation is being held below the target band by continuing negative tradables inflation. Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradables inflation, and rising non-tradables inflation. Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations.
Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data.
There is just one problem with this widely telegraphed rate cut (which promised that monetary police will continue to be accommodative) - it was too widely telegraphed, and the market had fully priced it in (with a 20% probability of a 50 bps rate cut) so much so that instead of weakening the currency, the shorts which had been piling in and hoping for even more from New Zealand central bank governor Wheeler, were disappointed, unleashing a massive short squeeze and stop-triggering cascade,which has as of this moment pushed the Kiwi to the highest level in the past year!