Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘loan default

Is CRE the next accident to happen?

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Commercial real estate is shaping up to become another causality of the financial crisis and CRE mortgage delinquencies and loan defaults are now starting to pile up on the balance sheets of US financial institutions. That is of course on top of losses from residential real estate, consumer credit and the securitization markets that sort of connect all the sore spots on Wall Street.

$817 billion of total CRE-loans are still outstanding in June, 2009, and about 29 billion have run into trouble. In the month of June loan delinquencies soared by $10 billion heating up the debate about future CRE losses by financial institutions.

But that’s not all. About $105 billion worth of troubled loans have been worked out. A majority of those loans experienced an averaged loss of almost 64 percent. Delinquency rates on CRE are up to 4.5 percent in the second quarter from 3.6 percent in the first quarter, 2009.

Similar to residential real estate CRE property prices have also collapsed. Moodys/REAL Commercial Property Price Index (CPPI) has not bottomed as of April 2009:

CREallPropertynationalindex

In CRE much like with residential real estate many loans have been securitized and actual losses to financial institutions and investors will therefore depend largely on two conditions. First, the total amount of loan defaults will be substantial given the collapse in prices. Second, FASB statements 166 and 167 will determine how big the losses are or if they can be deferred onto some future time horizon.

FASB statements 166 and 167 refer to securitized loans in special purpose entities, and require banks to consolidate insufficiently capitalized SPEs onto their balance sheets. Although this should foster more disclosure for investors its impaired with whims of possible rule-bending.

FASB determination to implement these rules is another uncertainty factor. In April, 2009 FASB halted fair value accounting to stop the hemorrhaging of impaired financial assets. Statements 166 and 167 are supposed to take effect in the first fiscal quarter beginning after November 15, 2009.

Some are already preparing for the worst. Bank of America now expects to bring about $150 billion back onto its balance sheet under the new FASB rules. This 150 billion off-balance-sheet assets comprise of $12 billion home equity conduits, $85 billion card securitizations, and other variable interest entities make up the remaining $53 billion. Maybe BofA is just lucky.

Eastern Europe showered with IMF funds

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The Raiffeisen Zentral Bank (RZB), a major Austrian bank with total assets of 156 billion euro, has issued results for the first quarter of 2009 today. While the bank is still making money profit after tax plunged to 29 million euro from 117 a year earlier, despite record revenues which increased 34 percent compared to last year.

Provisions for credit risk increased by a stunning 500 million euro to 596 million euro. RZB is one of the many European banks with heavy exposure to Eastern Europe. Devaluation of  local currencies led to a massive increase in troubled loans mainly in Ukraine, Russia, Hungary and Serbia, according to CEO Rothensteiner.

The dramatic development in Eastern Europe has caused the government of Austria, the EU and the International Monetary Fund (IMF) to intervene. Austria has already pledged 1.75 billion euro as participation capital for the RZB.

There is more concern in the region. The IMF has determined in a stress test that Romanian banks are also short of capital. They are in need of 1.7 billion euro. IMF experts think that output contraction in the region has not run its course yet.

Although due to large foreign currency reserves Russia does not need assistance from the IMF or the EU, Alexej Simanowski, head of bank supervision, urged banks to increase their capital by 12 billion euro. A necessary step to keep banks liquid if loan default would increase to 10 percent from about 4 percent today.

How precarious the situation is, becomes obvious from the plethora of assistance offered to Eastern European countries in the last 12 month. The IMF has granted Stand By Arrangements (SBA), pending SBA, Poverty Reduction and Growth Facilities (PRGF) and Flexible Credit Lines (FCL) to the tune of 80 billion US dollar. In the table below a loan of 2.1 billion USD to Iceland is also included.

Not included is Croatia. The outlook for long term credit rating has been lowered to negative from stable due to the deep recession . The country needs IMF assistance according to Fitch. 

IMF loan programs to eastern Europe:

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Written by Alfred

27. May 2009 at 12:12 pm