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Markets News Friday: Greece activates Eurozone-IMF €45bn bail-out; Goldman director said to have tipped off hedge fund billionaire on $5bn Buffett investment
By Finfacts Team
Apr 23, 2010 - 11:31:53 AM
From left to right: Nicolas Sarkozy, French President, Georgios Papandreou, Greek Prime Minister and Angela Merkel, German Federal Chancellor and Europe's principal paymaster, at the EU summit in Brussels, March 25, 2010.
The Greek government on Friday formally activated the Eurozone-IMF bail-out package that was approved by Eurozone leaders last month.
Prime Minister George Papandreou announced the decision in a televised address. "A few minutes ago I asked the finance minister to officially request the activation of the mechanism," Papandreou said in a brief televised statement from the Greek island of Kastellorizo, where he is on a visit. He added that requesting the aid had become"imperative and of national importance."
A 20-person team from the European Commission, the European Central Bank and the International Monetary Fund is in Athens and funds will be borrowed a 5% interest rate compared with a rate of almost 8% in the markets in recent days. In a week of public service staff protests, it is not known what additional conditions will be set. On Thursday, the EU's statistics office, Eurostat, said Greece's 2009 budget deficit was €32.3bn, or 13.6% of its GDP (gross domestic product). Greece had estimated the deficit at 12.7%. But Eurostat said it still didn't have confidence in the new figure and said it could actually be above 14%.
In a statement, the Greek finance ministry said the higher figure came about after a reexamination of the accounts of Greece's pension funds. It blamed problems on the defeated conservative government. "Restoring transparency and reliability of Greek statistics is an obligation towards our citizens, and a central commitment and top priority for this government," the ministry said.
Goldman Sachs: A Goldman Sachs director tipped off a hedge-fund billionaire about a $5bn investment in Goldman by Warren Buffett's Berkshire Hathaway before a public announcement of the deal at the height of the 2008 financial crisis, a person close to the situation says, according to The Wall Street Journal.
The Journal says the revelation marks a significant turn in the government's case against Raj Rajaratnam, the hedge-fund titan at the centre of the largest insider-trading case in a generation. Buffett's investment in Goldman in September 2008 was a watershed moment in the financial crisis. The legendary investor, whose father had brought him on a visit to Goldman's offices when he was 10-years old, helped allay fears about the instability of the financial system by backing America's leading investment bank.
The Journal says the new disclosure stems from a government examination into whether the Goldman director, Rajat Gupta, gave inside information to Rajaratnam. In a court filing March 22nd, the government alleged that Rajaratnam or "co-conspirators" traded on non-public information about Goldman. In a filing last week, the government provided more details about the information it alleges Rajaratnam received, including advance notice about the Buffett transaction with Goldman.
Rajat Gupta, who was born in India, was recorded from a wiretap, passing the information to Rajaratnam.
Bloomberg reports today that Warren Buffett still has great "confidence" in Goldman following last Friday's subprime fraud charge by the Securities and Exchange Commission (SEC).
“He’s not concerned with the investment at all,” Thomas Murphy, 84, a Berkshire Hathaway director, said in a Bloomberg Television interview, citing a telephone conversation with Buffett, Berkshire’s chief executive officer. “He has to see what’s going to happen on it, but I think he has great confidence in Goldman,” Murphy said. The two men spoke after the SEC announced its lawsuit, Murphy said.
The Greek Prime Minister requested aid from the IMF and EU Friday. "I've been amazed that the union has withstood the pressures it has thus far. I'm afraid that it won't be able to stand much longer," Dennis Gartman, founder of The Gartman Letter, told CNBC:
Irish government debt in 2009 not affected by statistical change: Davy chief economist, Rossa White, commented today -- "A mere statistical change seemed to have some negative impact on Irish bonds yesterday. On a day when Greek spreads shot higher (causing disruption to smaller euro area sovereigns), Ireland's deficit was revised up to 14.3% of GDP for 2009. But that revision was simply a statistical change, not a further cash advance. Last year's €4bn government injection into nationalised lender Anglo Irish Bank was reclassified from 'investment' to 'expenditure' by Eurostat. Debt had already increased by that amount last year, leaving Ireland's ratio still well below the average for now.
Government capital injections into banks are treated as financial transactions rather than expenditure by Eurostat as long as there is a reasonable possibility of getting a return. The provisional ruling saw the €4bn injection into Anglo being treated as such. Debt rose because the funds had to be raised, but the deficit did not initially. But it has been clear for many months that those funds will not be recovered (in fact plenty more is required to fill Anglo's capital hole). Yet there was no obvious opportunity for a ruling until the annual Maastricht return. The new ruling is that the funds are general government expenditure, raising the deficit by 2.5 percentage points of GDP. The underlying deficit was 11.8% (versus the December official forecast of 11.7%) but the adjusted figure is 14.3% of GDP.
Debt is the important matter however. Ireland's debt-to-GDP ratio was 64% last year, still 10 percentage points below the EU-27 and 15 points below the euro area-16 average. Even though the euro area average will rise, the gap between Ireland and the rest will close. We reckon that Ireland's general government debt-to-GDP ratio will rise to about 84% of GDP in 2010. Excluding banking requirements, debt may rise by around €20bn thanks to the deficit and pre-funding. But the initial promissory notes issued to Anglo and Irish Nationwide (at least another €11bn will be required for both institutions eventually) will lift the stock of debt this year by another €10.9bn. The government is unlikely to make any cash payment as a result of these notes until next year and issuance is only likely to be impacted in piecemeal fashion over 10-15 years."
Discussing Greece's request for a rescue package to be activated and the investigation on Goldman, with Kevin Ferry, Cronus Futures Management:
Economic View; Eurostat ruling doesn’t alter the underlying picture for Ireland:Goodbody chief economist, Dermot O’Leary, comments -- "Ireland finished top of a rather unfortunate league table last year. Ireland’s budget deficit hit 14.3%, ahead of Greece’s 13.6%, after revisions to the deficit figure were confirmed yesterday by Eurostat. At a time when Greece is moving closer to default and general concerns about the health of European sovereigns is intensifying, it is indeed disappointing from an aesthetic point of view for Ireland Inc. However, the majority of the revision relates to what the Department of Finance (DoF) described as a “technical reclassification” associated with the support provided to the banking sector, specifically the c.€4bn in aid that was provided to the nationalised Anglo Irish Bank. Ireland did indeed have to raise money to provide for this in 2009.
However, the DoF was keen to stress that this reclassification does not affect the budgetary parameters that have been agreed on for the coming years and that the underlying budget deficit for 2009 was 11.8% of GDP, close to the figure set out in the budget last December. We find it difficult to fathom how the monies allocated to Anglo Irish are included in the calculation of general government deficit in 2009, but the further €11.8bn that has already been mentioned as further injections into institutions that the government does not expect to make a return on will not be, as the DoF indicated to us yesterday. Within this figure, €8.3bn has been earmarked for 2010 for Anglo, along with €2.6bn for Irish Nationwide and €900m for EBS. If we were to include all of these funds in the general government figures, the deficit may actually rise to 18% of GDP in 2010. This, of course, would only be a once off, with the deficit falling sharply to 9% of GDP in 2011.
We will have to wait until the restructuring plans for Anglo Irish Bank are announced over the summer before we get a conclusive view on this issue, but it must be stressed that the government is correctly targeting the structural budget deficit. This deficit ballooned because the temporary increase in tax revenues because of the property boom hid what was a growing structural gap between revenues and expenditures during the 2003-2007 period. The Irish government has made significant strides at reducing this deficit with some tough decisions since the beginning of 2009 and yesterday’s news does not change that, although it must be accepted that aesthetics often do play a role in perception. Eurostat’s decision yesterday does not help in this regard."
US markets
On Thursday, the Dow rose 9 points or 0.08% to 11,134.
The S&P 500 added 0.23% and the Nasdaq advanced 0.58%.
Asia
The MSCI Asia Pacific fell 0.5% Friday.
The Nikkei 225 dipped 0.25%; the Shanghai Composite slid 0.53%; Australia’s S&P/ASX 200 Index also slipped 0.53% and India's Sensex Index climbed 0.61%.
In Europe, the Dow Jones Stoxx 600 has risen 0.86% Friday.
The ISEQ has advanced 2.86% in Dublin.
Market cap leader CRH has jumped 4.86%; AIB has climbed 3.14%.
Connemara Mining, the Irish AIM (London's small companies market) listed zinc explorer, has announced the discovery of a 39% combined zinc-lead deposit from the results of Hole 45 at Stonepark, Limerick.
The firm says Hole 45 represents the best intersection to date on the Stonepark project with a 7.45 metre thickness of 19.2% Zinc and 8.52% Lead recorded -- a combined 26% zinc-lead deposit. Hole 45 also intersected at 4.25 metre thickness of 26.64% Zinc and 12.30% Lead – a combined 39% zinc-lead deposit. At current zinc prices Irish style deposits are considered commercially viable at a combined 12% zinc-lead.
Drilling continues to expand the Stonepark North zone which now stretches over 500 metres.
John Teeling, chairman of Connemara Mining, commented, “This is a very significant result for a number of reasons. It is further confirmation of a commercial grade zinc discovery. The discovery now extends over 500 metres. The zone is at shallow depth. But, most importantly, this is a “sweet spot” which lifts the overall metal content in the deposit to grades which allow for economic mining.
These latest results demonstrate that Stonepark can produce the right concentration of metal. Combined zinc-lead grades of 39% over mineable widths are exceptionally rare. Exploration will continue to outline the extent of this zone and will try to find others like it”.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.
Last week, the BDI rose 3.3% to 3,009.
On Monday, the index fell 7 points to 3,002; on Tuesday the BDI dipped 4 points to 2,998; the index rose 11 points on Wednesday to 3,009; On Thursday, the BD! lost 3 points to 3,006.
In the Financial Times on Wednesday, Feb 17th, Javier Blaswrote that the weakness in the Baltic Dry Index, long seen as an indicator of global economic activity, does not reflect a downturn in global trade. Instead, the measure of freight costs is showing a strong supply of new vessels that helps explain the 40% drop in three months. “New supply is astonishingly high and it is overwhelming the otherwise robust demand for bulk commodities from China,” he wrote. “On the other hand, bullish investors should be cautious of any near-term turnround. Rather than a sign of stronger economic activity and commodities demand, it is likely to reflect cancelled orders, scrappage and port congestion.”
Irish Financials; Handbook for capital issues: Goodbody analyst, Eamonn Hughes, comments -- "BOI stands on the cusp of a substantial capital issuance, with media commentary indicating it is ready to push the button on Monday. In recent weeks, new capital targets (7% core equity at the trough) and the initial NAMA haircuts (c50%) has filled in some of the critical information gaps for investors. These inputs drive a requirement that BOI needs to raise €2.7bn of equity to address its capital deficit and €7.4bn at AIB.
Our base case sees the State control 22% of BOI (though a €1bn rights issue vs €1.6bn base case and more preference shares conversion could see this rise to 30%) and 39% of AIB. Ahead of the capital issuance, sustainable earnings discussions dominate our interaction with clients. But as the Irish banks restructure and de-lever, this exercise and its timing is complicated by a vast array of variables. In our view, the funding mix and prevalence of tracker mortgages ensures the margin normalisation process lags the pace of developments in the UK banks by at least 12-18 months.
So by 2014, we see (i) net interest margins move back to 2004 levels, (ii) non interest income at mid-20s levels of total income and (iii) cost/income ratios just north of 50%. Also, credit should normalise at 55bps of RWAs. We see normalised ROEs reach 13.5% by 2014, with normalised net income of €940m at BOI and €885m at AIB.A 13.5% normalised ROE, an 11% COE and long term growth of 3% drives a 9.7x PE and 1.3x P/NAV multiple on our 2014 normalised earnings. Presently, BOI is sitting on our fair value with c.25% upside at AIB. Cutting the figures another way, we estimate the Irish banks are trading on 4.0-4.2x prospective gross operating profit (2010f and we have AIB’s disposals mid year), though looking out to 2014, they are trading on c3.0-3.2x our normalised levels. As a reference, the UK banks appear to be trading on this year’s (consensus) GOP of 3-4x.
However, with so many variables at play determining normalised earnings, we believe the market will find most solace in 2010 NAV as the valuation reference tool of choice in the upcoming capital raises. We estimate BOI is trading on 0.92x its end 2010 NAV (naet asset value) and AIB is 0.81x (TERP adjusted - - Theoretical Ex-Rights Price). The domestic UK banks have moved up aggressively in recent weeks to 1.1-1.2x as the market gets excited about rebounding margins (from H109 troughs) and the fact that the UK banks are already moving to the “far side” of their credit cycle, which means sustainable ROEs are possible as early as 2012.
Also, core equity ratios are already well into double-digit territory, providing capital optionality going forward. In the case of the Irish banks, margins are only likely to trough in H2 this year (at the earliest, 18 months after the UK), arrears are still rising and capital ratios even post their recaps will still be well shy of the double digit levels in the UK. The market may get more confident about our normalisation process once margins and arrears start to stabilse, however, we think it’s hard to argue the Irish should push through 1x P/NAV for the moment. By our estimates, BOI can trade up to €2.1 per share before it hits 1.0x NAV, and its €2.5 for AIB, but the recent strength is already pricing in much of the upside."
