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It's not an insurance policy because you don't have to own the asset you're "insuring" (you can do the equivalent of taking out fire insurance on your neighbour's house for three times its value), and the "insurer" who sells it does not set aside regulatory capital for it.

It works like a bucket shop, in that you are placing side bets on exchange transactions. Bucket shops used to be illegal, for very good reason. Then the Commodity Futures Modernization(sic) Act happened.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 12th, 2012 at 03:37:16 AM EST
[ Parent ]
The modern paradigm of mathematical finance is that the One True Way to manage risk is to create risk indices, create liquid markets for assets based on those indices, and then use those assets for hedging risk exposures.

CDS fit the bill as long as they never trigger but the fiction that they might trigger is maintained by all concerned. Then, the "CDS spread" is a risk measure with an associated more-or-less-liquid asset, the CDS, which people can use to hedge the sensitivity of their pricing models to credit risk.

As soon as CDS start triggering, selling CDS becomes a risky proposition and the market for CDS becomes a lot less liquid, making it unsuitable for hedging and potentially leading CDS spreads to decouple from any "fundamentals-based estimate" of credit risk.

If credit events start happening and CDS don't trigger, the sale of CDS is exposed as a scam in the eyes of the genuine credit risk hedgers (those concerned about default losses, not about daily noise in prices and CDS spreads) and not only the market for CDS becomes illiquid again, but also people suddenly realise that <gasp> credit risk is not hedgeable, and in the current banking risk paradigm credit-risky business lines are abandoned.

Recall "Anglo-Saxon" banking abhors credit risk. The investment banking model prefers transaction-based or underwriting businesses where small amounts of capital are turned over at high speed in high-margin transactions. The ongoing collapse of Project Finance due to the problems of the Continental European banking system illustrates this: "Continentals" do credit risk (even in "Anglo-Saxon" markets), or used to until the current crisis hit.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:53:54 AM EST
[ Parent ]
but project finance is not quite "collapsing" yet.
From one of the data aggregators (sorry, no link, and data slightly camouflaged for confidentiality reasons):


Global Project Finance volume reached $[400]bn in 2011, the highest annual total on record and up 13% on the $[350]bn recorded in 2010. 4Q 2011 volume of $[90]bn was the lowest quarterly total of 2011 but was still 14% up on 4Q 2010

A record [900] projects reached financial close in 2011, an 8% increase over the previous record recorded in 2010



Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 12th, 2012 at 06:59:39 AM EST
[ Parent ]
Obviously you know more about the state of project finance. I am reacting to news such as these:

Yields on kangaroo bonds blow out (November 22, 2011)

The European Union's crisis of confidence has reached the distant shores of the local dollar debt market as once-unimpeachable EU institutions suffer huge rises in borrowing costs.

The last few days have seen a dramatic deterioration in the market for even the highest-rated EU sellers of kangaroo bonds, paper denominated in Australian dollars and sold in Australia by foreign firms.

The starkest example was the European Investment Bank (EIB), a triple-A credit funded by all 27 members of the euro zone and one of a group of borrowers known as supranationals.

European banks have not only lost a lot of the Eurodollar funding (leading to divestment from project finance portfolios in North America as you covered in your diary The first victim of the European bank crisis: investment in the US of September 15th, 2011) but they are also losing access to funding in Australia and elsewhere. And, as a consequence, BNP beats retreat on local loan exposure as euro crisis bites (December 17, 2011)
BNP, which is one of the oldest banks in Australia (it established operations here 130 years ago), has withdrawn from the $3.7 billion syndicated loan for the Victorian desalination plant and ended its $230 million participation in the $2.1bn financing for Sevenwest Media, for which it had been one of the lead banks.

Other syndicated loans from which European banks have withdrawn include the Royal Adelaide Hospital and the port business, DP World.

Funding packages for several blue-chip companies have also been affected, including Wesfarmers and Healthscope.

And, also, MUFG in talks on RBS Australia unit (June 29, 2011)
Bank of Tokyo-Mitsubishi UFJ is in advanced talks to buy RBS Australia's Sydney-based infrastructure advisory unit and its portfolio of public-private project finance assets.

The talks reflect MUFG's determination to expand its international operations as its domestic lending market stagnates and follows its November 2010 deal to acquire £3.3bn ($5.3bn) worth of assets in Royal Bank of Scotland's project finance portfolio in Europe, the Middle East and Africa.

The 30-strong Sydney unit, set up by Dutch lender ABN Amro more than a decade ago, is one of the largest groups specialising in private-public partnerships in Australia.

In other words, European banks are disappearing fast as global players in project finance, and the slack is being picked up not by Anglo-Saxon but by Asian banking.

This is partly because Europe is adopting credit-unfriendly financial regulation, in addition to the effects of the Euro crisis on foreign funding positions.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 07:34:24 AM EST
[ Parent ]
From a commment on the London Banker thread linked to by rifek in the diary:
I see that you are now feeling the pains of reality. "Is it possible to reform a failed regulatory system sufficiently to restore a functioning market? "

My answer to you is: not this time. There is nobody with the will and the strength to stand up to Power.

...

The US is about to implode followed by the UK and then EU. There is a shift now and it is towards Asia between Perth WA and Vladivostok. Singapore has been preparing to become the main financial services sector in the World and it is also there.

The West is dying of its own incompetence and arrogance expressed in its inept "leadership.



There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 07:58:43 AM EST
[ Parent ]
which I'm not, I would see signs of "shock doctrine" here.

The crisis is the opportunity to kill euro-style project financing, replacing it with "anglo-saxon" banking? Does "follow the money" tell us anything here?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Mar 12th, 2012 at 09:24:53 AM EST
[ Parent ]
The West is dying of its own incompetence and arrogance expressed in its inept "leadership.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 09:39:47 AM EST
[ Parent ]
Does "follow the money" tell us anything here?

Japan, China and Singapore?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 09:40:10 AM EST
[ Parent ]
I think they are taking advantage, more than propelling the change.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Mar 12th, 2012 at 10:22:11 AM EST
[ Parent ]
I don't think a conspiratorial reading holds water.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 10:24:28 AM EST
[ Parent ]
Most conspiracies confuse cause and effect.  Reaping a benefit does not mean one is causing the benefit.  It just means you're paying attention.
by rifek on Mon Mar 12th, 2012 at 06:48:25 PM EST
[ Parent ]
Or one is the last one left standing after the competition self-immolates.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 07:21:08 PM EST
[ Parent ]
Credit-unfriendly financial regulation?
by Metatone (metatone [a|t] gmail (dot) com) on Mon Mar 12th, 2012 at 10:21:58 AM EST
[ Parent ]
Credit risk is heavily penalised (relative to market risk) by regulatory requirements and market perceptions of capital adequacy.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 10:24:02 AM EST
[ Parent ]
My memory is getting worse and worse recently...
by Metatone (metatone [a|t] gmail (dot) com) on Mon Mar 12th, 2012 at 11:55:55 AM EST
[ Parent ]
Would you please elaborate on this?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 12th, 2012 at 12:38:18 PM EST
[ Parent ]
True credit risk cannot be collateralised.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 12:58:41 PM EST
[ Parent ]
Because of the fact that most defaults happen at the same place in the business cycle?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 12th, 2012 at 02:49:05 PM EST
[ Parent ]
... and the fact that you can't outsource your due diligence.

The opinion of some dude who hasn't done his own due diligence on the credit risk of a security is just his opinion. The opinion of a million dudes who haven't done their own due diligence on the credit risk of a security is also just their opinion. Putting their opinions together and calling it a "market" does not make it any more than the opinion of some dudes who haven't done their own due diligence.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 12th, 2012 at 04:29:41 PM EST
[ Parent ]
But you can actually outsource the credit risk to someone else. Thah's just what the big Wall Street banks did when they sliced and diced all those toxic mortages, repackaged and sold them on to Düsseldorf and all the others.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 12th, 2012 at 04:41:04 PM EST
[ Parent ]
You can transfer credit risk, but you cannot hedge it.

Because, unlike market (price) risk, which is anonymous, credit risk is associated to a particular counterparty.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:49:07 PM EST
[ Parent ]
You can pool it, and you can subdivide the pool. But you cannot make the risk go away.

In some jurisdictions you can take it off balance sheet, but that doesn't make it go away.

Or you can sell it, but then the buyer is exposed to the full credit risk as if they had originated the loan.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:54:47 PM EST
[ Parent ]
But you can actually outsource the credit risk to someone else. Thah's just what the big Wall Street banks did when they sliced and diced all those toxic mortages, repackaged and sold them on to Düsseldorf and all the others.

Yes and no. You can sell it, obviously, but you can't outsource it in any meaningful sense. At most, you can buy CDS on your credit risk, but this does not hedge your credit risk - it merely substitutes one credit risk for another.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 09:39:14 AM EST
[ Parent ]
Due diligence cannot protect you from shit happens.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:56:07 PM EST
[ Parent ]
shit happens

The preferred term, used by all the Serious People©, is "Black Swan Event."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Mar 12th, 2012 at 05:12:58 PM EST
[ Parent ]
That's not what I'm talking about. Suppose you know that the True Probability™ of someone being unable to repay you is 5%. Then what? Did due diligence protect you form credit risk?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 05:20:34 PM EST
[ Parent ]
If you know that the True ProbabilityTM of non-payment is 5 %, you can discount those five per cent when making the loan.

If that renders the effective interest incompatible with the customer's business plan, then you can not make the loan. If the loan represents a large fraction of your equity, then you can not make the loan.

This is why you need to do it before making the loan.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 09:54:18 AM EST
[ Parent ]
Non-payment will be a lot more damaging to your balance sheet than a nominal loss of 5% interest, surely? In accounting terms you have to list the bad debt in full.

But this is tangential to CDOs, where you can sell the same worthless non-coverage to multiple buyers over and over, with the certainty that if any of them try to claim on their 'coverage' you can shrug and say it's not your problem.

Oh - and the government will probably bail them out anyway.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Mar 13th, 2012 at 10:12:42 AM EST
[ Parent ]
But as long a you have the capital to issue a lot of independent 5 % non-payment risk loans, you can get away with simply discounting it 5 %.

The salient point here is that you only get to do that with idiosyncratic risk, because systemic risk is, by its nature, not independent. This is why properly run industrial societies use government back-stops to ensure that not everyone is unemployed and broke at the same time. Because the government, as the only entity which is definitionally solvent, is the only entity which can serve as a backstop against systemic risk.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:17:36 AM EST
[ Parent ]
I think the key thing we should have learned from LTCM is that it's difficult to determine which risks are independent, which are not, and what sort of feedback the dependent ones will create for one another.
by rifek on Tue Mar 13th, 2012 at 03:00:20 PM EST
[ Parent ]
No, the key take-home points from the Long Term Capital Management fiasco are:

  • The market can remain irrational longer than you can remain solvent.
  • Don't bet your entire business that you're the smartest guy on the block.
  • Don't bet your entire business on any single transaction, particularly when that transaction does not keep the two first bullets firmly in mind.

Of course, none of this should have been in any way novel or surprising, and the fact that humanity regularly has to re-learn such simple matters of common prudence does not auger well for our collective cognitive prowess.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 03:18:59 PM EST
[ Parent ]
We knew those before.  LTCM thought that, if some risk spreading is good, more is better, but they never took into account that if you spread risk far enough, it becomes recursive.
by rifek on Wed Mar 14th, 2012 at 02:41:54 PM EST
[ Parent ]
They drank their own cool-aid.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 14th, 2012 at 04:34:04 PM EST
[ Parent ]
Non-payment will be a lot more damaging to your balance sheet than a nominal loss of 5% interest, surely? In accounting terms you have to list the bad debt in full.

Precisely! The problem with credit is that the risks are all "in the wrong direction". You get a small income stream at a rpofit in exchange for the risk of a large loss. And risk-aversion magnifies the perception of losses.

Also, diversification doesn't quite work. If you have 20 bonds with a default probability of 5% you're virtually guaranteed a loss of 5% no matter what so it's all pain, no gain. You're maybe better off gambling on just one bond where at least you have a sizeable probability of making a profit.

Naked CDS are much "better" - you pay a small fee in exchange for the chance of a big payout.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 10:20:34 AM EST
[ Parent ]
No, you can diversify it away as long as it is idiosyncratic risk. The fact that you are virtually guaranteed to suffer on the order of 100 defaults out of 2 thousand loans just means you have to charge 5 % extra on all the loans.

Where this breaks down is when everybody goes broke at the same time, because some right-wing idiot (but I repeat myself) was allowed to play with levers of government that he has neither the understanding nor the inclination to handle safely.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:29:05 AM EST
[ Parent ]
The fact that you are virtually guaranteed to suffer on the order of 100 defaults out of 2 thousand loans just means you have to charge 5 % extra on all the loans.

It means you're virtually guaranteed no upside and all downside. Logarithmic utility can be really nasty on the downside.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 10:30:42 AM EST
[ Parent ]
No, it means I'm virtually guaranteed a payment stream of 95 % of the nominal payment stream, assuming the defaults are uncorrelated.

You need to look at the discounted value of the expected cash flow rather than the nominal principal, for the same reason you need to look at MWh produced rather than nameplate capacity when evaluating the required price of volatile energy sources.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:36:35 AM EST
[ Parent ]
I agree fully with Jake's side of the argument here.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 10:46:09 AM EST
[ Parent ]
"assuming the defaults are uncorrelated."

Um.

by Colman (colman at eurotrib.com) on Tue Mar 13th, 2012 at 10:54:33 AM EST
[ Parent ]
In a properly run economy, they are. Because the sovereign employer and investor of last resort makes sure that the macroeconomy does not go boom.

If you hand the keys to the sovereign over to right-wingers, then of course they break it. But that is not dependent on the particulars of finance theory - right-wingers break your economy because breaking countries for fun and profit is what right-wingers do.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 11:05:36 AM EST
[ Parent ]
Analytical simplicity. The general argument still holds even with correlated defaults.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 12:33:23 PM EST
[ Parent ]
because due diligence forces you to have prepared a plan B for lots of different things, and to demonstrate your general ability to deal with the unexpected.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 12th, 2012 at 05:57:26 PM EST
[ Parent ]
In other words, due diligence is at least as much about "Know thyself" as "Know thy counterparty".
by rifek on Mon Mar 12th, 2012 at 06:53:32 PM EST
[ Parent ]
Sun Tzu and the Art of Finance.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 07:18:11 PM EST
[ Parent ]
And Lao Tzu and Musashi.
by rifek on Tue Mar 13th, 2012 at 01:49:01 AM EST
[ Parent ]
Due diligence cannot protect you from shit happens.

Define "protect."

Part of doing your due diligence is to make sure that the contract you are entering into will not cause your firm to cease to exist if shit happens. Unless said shit is so bad that your firm has a meaningful risk of ceasing to exist anyway. Part of doing your due diligence is to ask "what could possibly go wrong?" come up with a reasonably comprehensive answer, and then make contingency plans for all of those situations. Even if the contingency plan is just "in case of nuclear war, roll over and die."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 09:52:59 AM EST
[ Parent ]
:)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Tue Mar 13th, 2012 at 05:07:38 AM EST
[ Parent ]
Because if I loan you money but ask you to collateralise it...

...it's not a loan. It's a liquidity operation.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon Mar 12th, 2012 at 04:47:44 PM EST
[ Parent ]
That is the pawn broker business model, right?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon Mar 12th, 2012 at 05:16:17 PM EST
[ Parent ]
project finance loans are weakly correlated to the business cycle.
This is a sector that's been studied left and right - it has lower default rates, higher recovery rates in case of default, and limited correlation to other banking assets.

Banks know that and they keep on doing it, even as it goes out of fashion.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 12th, 2012 at 05:49:51 PM EST
[ Parent ]
Because if it's collateralized, it isn't at risk?
by rifek on Mon Mar 12th, 2012 at 06:50:14 PM EST
[ Parent ]
What's the credit risk of a secured credit card?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:34:13 AM EST
[ Parent ]
None, it's fully liquid.  Non-liquid collateral is a different issue.
by rifek on Tue Mar 13th, 2012 at 02:33:52 PM EST
[ Parent ]
Are you talking about different kinds of risk here?

If I pawn a clock or a house, the lender does not have a credit risk, but a risk that their evaluation of the value of the collateral will not be correct when if a time comes when the collateral needs to be sold.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 13th, 2012 at 03:54:43 PM EST
[ Parent ]
They have a credit risk, that you won't pay. Only after you don't pay do they get to liquidate your collateral. Then they have liquidity risk.

Then again, some people say "all risk is liquidity risk".

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:39:25 PM EST
[ Parent ]
But that is clearly false. Liquidity risk can be made to go away entirely (at least within the system of banks in good standing) through appropriate central bank policy. This will not, however, do anything about credit risk.

Liquidity risk is a political problem of whether you get to defer payment. Credit risk is a fundamental problem of whether you are able to make payment.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 06:55:13 PM EST
[ Parent ]
So why are people made to pay interest from the privilege of borrowing from their own collateral?

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:44:12 PM EST
[ Parent ]
I suppose it's just a way to trick retail bank customers. Like "actively managed" mutual funds that behave exactly like index funds, but have three times as high fees.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 06:04:54 PM EST
[ Parent ]
No, it's actually a way to extract tribute from people with poor credit.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 06:06:46 PM EST
[ Parent ]
No one is forced to have a credit card. But people can be tricked into it. Just like people can be tricked into putting their savings in "actively managed" funds.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 06:10:20 PM EST
[ Parent ]
In the US, you're practically an unperson without a credit card:
You need one to make a hotel or plane reservation, or to rent a car, even if you plan to pay cash. Many stores require a credit card to accept your check. Responsible use of a credit card builds a good credit rating, too, marking the owner as mortgage-worthy.

But people who have never had credit or need to repair a poor credit history may not qualify for a regular credit card.

(link)

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 06:11:05 PM EST
[ Parent ]
I've never used or even had a credit card in my entire life. Why not just use a debit card instead? I do that all the time.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 06:24:21 PM EST
[ Parent ]
The US system appeared absurd to me too, the first time I heard of it, but there it is. If you can't deliver a credit card company that says you payed your bills on time, you are not creditworthy.

Sweden instead uses implicit credit worthyness unless the central government register says that we failed to pay a bill so many times that it ended up with Kronofogden.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 14th, 2012 at 04:35:20 AM EST
[ Parent ]
In France, you get to be "interdit bancaire" (blacklisted by a government file, and denied all banking services), basically if you ever write a dud cheque. There is now (this is recent) a government-mandated minimum service that banks are obliged to provide to people who are blacklisted, which amounts to a debit card.

The advantage of this system is that you can (could, until a few years ago) write a cheque for just about anything. The banks are trying hard to stamp out the massive use of cheques (because they cost them money) and force us to use credit (or debit) cards.

Credit card balances are paid off automatically every month from your bank account, so you can't have outstanding balance on your card (what you have instead is an overdraft).

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Mar 14th, 2012 at 06:59:05 AM EST
[ Parent ]
You still use cheques in France? I think we phased them out in like the mid 80's.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 14th, 2012 at 10:40:39 AM EST
[ Parent ]
We still use them in the U.S......(I've never seen them in Italy). But the system is broken.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Mar 14th, 2012 at 11:14:54 AM EST
[ Parent ]
As do I.  The bulk of debit cards here in the US can be used the same as a credit card.  Secured credit cards are frankly a predatory practice no one sees fit to regulate.  They prey on the patently ignorant and on those whose creditors would garnish any bank account they opened.
by rifek on Wed Mar 14th, 2012 at 02:59:15 PM EST
[ Parent ]
You have obviously not been denied a mobile phone contract because you didn't have a credit rating (good or bad: no credit rating is worse than bad credit) which you could only establish with a credit card.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 14th, 2012 at 03:02:31 PM EST
[ Parent ]
People in that situation should be able to get pre-paid cell phones. If not, that is a real abuse, as there is no risk. As soon as you reach your pre-paid limit you can only use the phone to dial 911 or the provider's line to add more minutes. Now, if you don't have a credit card, it may be necessary to go to a retail outlet to add more minutes to your cell phone. In Arkansas there are plans specifically for low income people designed to provide them with basic communications for health and safety. Such plans provide much better phones than the cheapest available. That is probably a boondoggle for the providers.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 14th, 2012 at 04:42:48 PM EST
[ Parent ]
That's just one example of what you can be denied for having no credit history. You can be denied anything that involves a credit check, which is becoming increasingly standard when dealing with corporations. You may be denied an apartment rental application, for instance. You may be denied a car rental. Your debit card may not be accepted for online payments. And so on and so forth.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 15th, 2012 at 05:22:04 AM EST
[ Parent ]
From Wikipedia: In Hungary Sweden debit cards are far more common and popular than credit cards. Many Hungarians Swedes even refer to their debit card ("betéti kártya" "kontokort") mistakenly using the word for credit card ("hitelkártya" "kreditkort").

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 13th, 2012 at 06:27:48 PM EST
[ Parent ]

European banks are disappearing fast as global players in project finance

Not really. They have been reducing their exposure by selling well-identified portfolios or local activities which don't limit their ability to continue the rest of the business (for instance, BNPP sold a large portfolio of "reserve-based assets" in the US, i.e. loans to medium sized oil&gas operators in the US backed by rights to the underlying resource (i.e. the oil reserves). With good geologists (which most banks doing this business have in-house), this is a low risk business, but it's fairly capital-intensive. Selling this is something you can do as a decent price (other banks know these are sound assets, so there is enough competition to ensure the discount is not large), and which frees up quite a lot of capital; at the same time it's specialized enough that getting rid of it does not cut into your other activities.

The league tables for 2011 show the usual suspects at the top, i.e. the Indian banks (big local market), the French, the Japanese, the Spanish and the Dutch banks.

Japanese banks are indeed moving up, but the there ones are not disappearing.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 12th, 2012 at 05:56:21 PM EST
[ Parent ]
FWIW i saw on bloomberg yesterday that there is a significant uptick in 'angel' investing, which i assume is investment money planted in projects of intrinsic social worth, not just for the quickest, largest profits.

seems like a Good Thing.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Mar 13th, 2012 at 05:06:29 AM EST
[ Parent ]
"Angel investing" refers to very early stage venture capital. It is called so not because of any implied generosity - they fully expect to get paid - but because very early startups have no tangible assets to serve as collateral for the "angel investor."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:19:25 AM EST
[ Parent ]
What Jake said.  And this is just more evidence that the system has become addicted to abnormally high rates of return.  It has to be a killing, it has to cover the front-end load, and it has to happen now.
by rifek on Tue Mar 13th, 2012 at 02:37:05 PM EST
[ Parent ]
Actually, of all sectors of finance, I would think project finance would be relatively strong right now, albeit highly dependent on the country we want to reference, given everything going on in the energy markets as well as residual stimulus spending by a lot of countries.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Mar 12th, 2012 at 07:46:09 AM EST
[ Parent ]
Beppe Grillo's Blog
The public debt mole
Information regarding the high-speed railway project has been totally lacking, probably because the interests that lie behind these major works had no interest whatsoever in informing the public. On the other hand we have this extraordinary mobilization and support that the No TAV movement is seeing today, particularly in the Val di Susa ...
For the past 20 years now this valley's numerous technical experts have been informing the citizens and the mobilisation that we are seeing now is the fruit of twenty years of effort and of awareness of the technical merits that Valley reflected in the numbers that show the total uselessness of this major public works. In this regard, the fact that the major media have chosen to ignore this issue for the past 20 years and now tend to focus on reporting only on those issues relating to public order and appear to be incapable of evaluating the merits of this issue is proof that interests, probably even in the cultural collapse of this Country, lie only in slogans, in ideologies and the flags that certain works of this nature may represent for the ruling class and that these kinds of works are merely an extension of their total inability to conceive any sort of vision for the future. But I am becoming ever more convinced that this ruling class is structurally bound to worry only about the present because the minute there is any sort of appraisal of the effects that their actions have on the future, they stand to immediately lose all of their privileges.
The only interests are the annual budget and short-term results and for the bankers, it is getting their hands on some serious stock options, while for the politicians who live in the here and now, it's all about next month or next year's political outcomes and for the entrepreneurs in charge of the virtual companies, it's all about managing the debt.
There will probably be no winners and we are all going to lose out in the end! They are gambling the future of our economy on these major public works, particularly here in Italy, because the financial architecture that is built on these major works are mechanisms designed to dig out hidden public debt from the accounts of privately held companies, this so-called project financing that has many politicians talking since public resources have become more scarce. However, this is precisely the mechanism that brought about the 2009 crash. In that case the debt was built on private funding while in this case the debt is being dumped into the public debt. That's what project financing is all about, a mole that causes future public debt that has to and will inevitably surface at some point in the future. This mole has been digging away for many years already, since way back in the 90's, since the post-Tangentopoli era and it is going to surface sooner or later because it is a hidden debt. The project financing debts or the debts of privately owned public companies may not be reflected in the 120% of GDP, but they are nevertheless public debt that is concealed in the accounts of private companies and will have to surface sooner or later. It is difficult to say when this will happen, however, it is not going to be in the long-term and when it does happen, any of these major works that have already begun will go to the wall and this debt will explode and reverberate on us all and on the economy as a whole!

kindly deconstruct.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Mar 14th, 2012 at 07:41:09 AM EST
[ Parent ]

this is precisely the mechanism that brought about the 2009 crash.

That's false. What is true is that governments have used PPP (public private partnerships) as a way to avoid public debt (they pay "rent" on infrastructure which is privately-owned for a number of years after it's built) and this tends to be more expensive in the long term than the State building it itself and paying for it. Depending on how well the tender is defined, it can be an effective tool, and a real way to pass on some risks to the private sector.

So PPP is a different way to build infrastructure, with more private sector involvement, and it can result in some unnecessary transfers of money  from public to private hands over time, but it's not crazy and it does not create systemic risk.

Even if not done in the most effective way, it is lending to real infrastructure projects. Whether these are necessary or not is not really linked to how they are financed (private contractors would lobby for them anyway if government were to pay for them), and that financing certainly did not create the financial crisis.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 14th, 2012 at 08:43:26 AM EST
[ Parent ]
And both the "policy" and the "premium stream" are dealt down the line, unlike insurance policies.  You can't tell who's actually obligated to cover.
by rifek on Mon Mar 12th, 2012 at 06:34:02 PM EST
[ Parent ]

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