THE City’s office rental market faces “imminent stress” as demand for space in the banking sector is slowing, an influential report revealed yesterday.
As the credit crunch tightens its grip and demand among banks — the largest tenants in the Square Mile — falls, the once-booming rental market in London is experiencing rising vacancy levels and an over-supply of development, according to research firm Moody’s.
The twice-yearly report, which looks at the strength of European office markets and classifies them green, yellow or red, slapped a code red rating on the Square Mile, warning of “imminent stress”.
“The most significant market deterioration was seen in London City and it is noteworthy that all three London office sub-markets [City, Docklands and West End] showed signs of deterioration mainly due to a decline in forecast takeup levels,” the report said.
In Docklands there will be no new net take-up of office space in 2008, the report said, and even the West End — historically London’s most resilient office market — showed signs of weakened demand and climbing vacancy rates last year.
Fintag says
You can stand virtually anywhere in the City of London and see cranes, empty holes, demolished 1970′s concrete extravagances, complete spanking new 21st Century glass saturated office blocks with let signs outside, and many half finished. Not since the late 1980′s has the square mile seen such development.
There is however too much office space. With companies leaving to avoid the UK’s ever increasing inflation and tax uncertainty, banks (who are main employers) shedding 10′s of thousands of jobs, and general oversupply with no demand, the City is half dead. It is almost like a ghost town:
Someone told me that you can tell all is not well. The cranes are not moving. A sure sign that developers have run out of cash.
Amazing action in the normally sedate Japanese government bond market actually forced the Tokyo Stock Exchange on Friday to order an unprecedented 15-minute halt in trading of JGB 10-year bond futures. The Exchange made the move in an effort to calm hectic dealing in what Reuters described as “one of the worst sell-offs in the past decade”.
….
It’s seldom said, concludes Lex, “but the JGB market will be no place for the faint-hearted in coming weeks”.
VIENNA, Wednesday, April 16, 2008 – At its Annual General Meeting in Vienna today, the International Swaps and Derivatives Association, Inc. (ISDA) announced the results of its Year-End 2007 Market Survey of privately negotiated derivatives.
The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 in the second half of 2007 from $45.5 trillion at mid-year. CDS notional growth for the whole of 2007 was 81 percent from $34.5 trillion at year-end 2006. The survey monitors credit default swaps on single names and obligations, baskets and portfolios of credits and index trades.
Notional amounts of interest rate derivatives outstanding, grew almost 10 percent to $382.3 trillion in the second half of 2007 from $347.1 trillion at mid-year 2007. For the year as a whole, interest rate derivatives notionals rose 34 percent from $285.7 trillion. For the purposes of the survey, interest rate derivatives include interest rate swaps and options and cross-currency interest rate swaps.
Notional amounts of equity derivatives reached $10 trillion at year-end 2007, which represents an annual growth rate of 39 percent from $7.2 trillion at year-end 2006. This number remained flat between mid-year and year-end 2007. Equity derivatives for purposes of the survey comprise equity swaps, options, and forwards.
“As ISDA’s Year-End 2007 Market Survey highlights, the privately negotiated derivatives business continues to grow. While the amounts at risk are just a fraction of notional amounts, these give us a good sense of market activity,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “Developing tools to manage counterparty credit is an important feature of ISDA’s work. Equally important are our efforts to reinforce the operational infrastructure to enable scalable growth and improve and liquidity for the continued development of these important risk management tools.”
The above notional amounts, which total $454.5 trillion across asset classes, are an approximate measure of derivatives activity, and reflect both new transactions and those from previous periods. The amounts, however, are a measure of activity, not a measure of risk. The Bank for International Settlements (BIS) collects both notional amounts and market values in its derivatives statistics and it is possible to use the BIS statistics to determine the amount at risk in the ISDA survey results.
As of June 2007, gross mark-to-market value was approximately 2.2 percent of notional amount outstanding. In addition, net credit exposure (after netting but before collateral) is 0.5 percent of notional amount outstanding. Applying these percentages to the total ISDA Market Survey notional amount outstanding of $454.5 trillion as at December 31, 2007, gross credit exposure before netting is estimated to be $9.8 trillion and credit exposure after netting is estimated to be $2.3 trillion.
The ISDA Year-End 2007 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of December 30, 2007. All notional amounts have been adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 91 firms provided data on interest rate swaps; 81 provided responses on credit derivatives; and 83 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.
More pertinent video on YouTube in 5 Parts. Jon Moulton of private equity firm Alchemy Partners, London, explains how the banks were involved in Mark’s part 3 “The Crime”.
The UK banks have not raised anywhere near enough new capital yet. More evidence below.
Bank of England sounds alarm on £5bn commercial property defaults
By Edmund Conway, Economics Editor
Last Updated: 10:27am BST 01/05/2008
Britain’s big banks stand to lose as much as a fifth of their profits as the commercial property market implodes, the Bank of England has warned.
Banks have reported no major write-offs from the slump. The Bank of England warned this will not persist
The Bank sounded the alarm on a £5bn-plus wave of real estate defaults which could engulf the financial sector before it has even recovered from the sub-prime crisis.
It used today’s Financial Stability Report to warn that, despite falls of more than 15pc in commercial property prices, banks have continued to pile into the sector and could now face significant losses.
Although it predicted the global financial crisis may soon be at an end, it warned that banks may have to weather losses from other sources.
The office and professional building market is in the midst of its biggest crash in more than a decade. However, banks have reported no major write-offs from the slump. The Bank warned this will not persist.
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It projected that if a tenth of outstanding commercial property loans default this could cost the UK banking sector £5.1bn, or 19pc of its annual pre-tax profits.
EXTRACT: A particularly persuasive reading comes from Doug Noland at Prudent Bear. A student of Hyman Minsky, he takes his theory of “Monday Manager Capitlaism” one step further into “Financial Arbitrage Capitalism,” which means that the inmates are not merely running the asylum, they’ve learned how to position themselves not as crooks, but as prison facilities managers, expand their operations to other locales, and secure government funding.
In all seriousness, the problem that Noland alludes to is that finance is now driving the real economy. And given how speculative our financial system has become, this is leading to poor capital allocation and increased volatility, both of which will dampen growth. Keynes considered reducing volatility to be a major goal of policy, since it would lower the risk premia investors required, and more favorable interest rates would promote greater investment and with it, growth (note that Keynes did not propose the countercyclical measures that have become associated with his name). But high volatility produces the reverse effect: investors demand higher returns to compensate for heightened risk, which reduces invesment. But traders find it hard to make money in quiet markets; a certain level of fluxuation is their friend. So Wall Street’s interests can and increasingly do conflict with those of Main Street.
An excellent overview of what’s really going on. To me it smells, feels and tastes like it’s a pretty accurate analysis. The solution is to apply a tax to all forms of derivatives creation and trading but no-one seems game to take on the financial community so directly . Is it really because financial games are now more important than the real economy and govs are just too scared to upset them? Tim
Economic Internalionalism 101 (for US Presidential Candidates)
EXTRACT:
Many of the measures that are required to make a lasting, substantive contribution to the standards of living of the modal American worker will take years or even decades to implement.
Much of the US transportation infrastructure is rubbish and overly dependent on road transport. A serious increase in infrastructure investment, most of which will have to be publicly funded and ultimately paid for through higher taxes or lower public spending elsewhere, is long overdue. This will take at least a decade to have a noticeable effect, even if we were to start today.
Not only does America’s infrastructure encourage and subsidise unsustainable transportation methods, American production technology in general, and the products it makes tend to be overly energy-intensive. That is not surprising. Even in California, ‘gas’ or petrol sells for under $4.00 a US gallon. In London, UK, a US gallon of gas costs over $8.00. A $4.00 additional Federal tax on a gallon of gas would help kick the US into the 21st century. Commensurate tax increases on other uses of greenhouse gas emitting substances (e.g. those used for heating, cooling, power generation etc.) would also have to be implemented. To avoid a contractionary effect on aggregate demand, the carbon tax increase could be returned to US households as a progressive cut in income taxes. With domestic incentives better reflecting current and future global resource scarcity, it is more likely that US industry will produce goods and services the world will actually want to buy. This will take years, even decades, to percolate through from the design stage to the production line and the shelves of foreign distributors.
The competitive edge the US used to have over the rest of the world because of the quality of its labour force, reflecting the excellence of its educational system has been eroding steadily. In my own professional universe, the best US universities, especially those with research-oriented graduate and professional schools, continue to be world leaders. But they are increasingly islands of excellence in a sea of mediocrity. The US state-funded high school system provides far too many of its students with a sub-standard education that prepares them, at best, for menial labour. We know from the UK experience that simply throwing more money at a publicly funded sector (be it health, education or the military) does very little to improve its efficiency and productivity. Most of it will simply disappear as rents for the incumbent producers. The incentives and inputs of the producers (teachers and heads) and of the consumers (pupils and parents) need to be changed to get better performance. This will take at least a generation to implement.
A (slightly messy) Chart of the Day – corporate demand for credit goes the way of consumer lending and mortgages. It comes from the ECB’s lending survey for April – a publication that Robert Self, banking analyst at Credit Suisse, likes to keep a close eye on, since credit cycles have tended to correlate tightly with lending standards.
Average French household debt was 47 percent of gross domestic product in the third quarter of 2007, compared with 59 percent for the euro zone and 97 percent in Britain, according to Standard and Poor’s.
Credit Default Swaps Losses Estimated at $150 Billion
There is piece on Bloomberg this morning, that uncharacteristically lacks a news hook on counterparty risk in the credit default swaps market.
The story argues that the other shoe may finally drop in the $62 trillion CDS market due to rising junk bond defaults. We’ve long seen that market as a disaster in the making. With economic exposures estimated at 2% of notional amount, $1,2 trillion is at risk, making it larger than the subprime market. Thus the $150 billion in losses estimated by BNP Paribas analyst Andera Cicione is plausible.
12 Responses to “Mark’s analysis of the current economic crisis”
April 25th, 2008 at 3:03 am
Another deck of cards:
CRASH WARNING FOR THE CITY’S OFFICE MARKET
THE City’s office rental market faces “imminent stress” as demand for space in the banking sector is slowing, an influential report revealed yesterday.
As the credit crunch tightens its grip and demand among banks — the largest tenants in the Square Mile — falls, the once-booming rental market in London is experiencing rising vacancy levels and an over-supply of development, according to research firm Moody’s.
The twice-yearly report, which looks at the strength of European office markets and classifies them green, yellow or red, slapped a code red rating on the Square Mile, warning of “imminent stress”.
“The most significant market deterioration was seen in London City and it is noteworthy that all three London office sub-markets [City, Docklands and West End] showed signs of deterioration mainly due to a decline in forecast takeup levels,” the report said.
In Docklands there will be no new net take-up of office space in 2008, the report said, and even the West End — historically London’s most resilient office market — showed signs of weakened demand and climbing vacancy rates last year.
Fintag says
You can stand virtually anywhere in the City of London and see cranes, empty holes, demolished 1970′s concrete extravagances, complete spanking new 21st Century glass saturated office blocks with let signs outside, and many half finished. Not since the late 1980′s has the square mile seen such development.
There is however too much office space. With companies leaving to avoid the UK’s ever increasing inflation and tax uncertainty, banks (who are main employers) shedding 10′s of thousands of jobs, and general oversupply with no demand, the City is half dead. It is almost like a ghost town:
Someone told me that you can tell all is not well. The cranes are not moving. A sure sign that developers have run out of cash.
http://fintag.com/ Friday April 25th., 2008
April 25th, 2008 at 5:10 am
JAPAN AGAIN – NOW CLOSED FOR GOLDEN WEEK
Massive JGB selloff roils market
Friday Apr 25
Amazing action in the normally sedate Japanese government bond market actually forced the Tokyo Stock Exchange on Friday to order an unprecedented 15-minute halt in trading of JGB 10-year bond futures. The Exchange made the move in an effort to calm hectic dealing in what Reuters described as “one of the worst sell-offs in the past decade”.
….
It’s seldom said, concludes Lex, “but the JGB market will be no place for the faint-hearted in coming weeks”.
http://ftalphaville.ft.com/blog/2008/04/25/12616/massive-jgb-selloff-roils-market/
April 27th, 2008 at 10:25 am
ISDA PUBLISHES YEAR-END 2007 MARKET SURVEY
VIENNA, Wednesday, April 16, 2008 – At its Annual General Meeting in Vienna today, the International Swaps and Derivatives Association, Inc. (ISDA) announced the results of its Year-End 2007 Market Survey of privately negotiated derivatives.
The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 in the second half of 2007 from $45.5 trillion at mid-year. CDS notional growth for the whole of 2007 was 81 percent from $34.5 trillion at year-end 2006. The survey monitors credit default swaps on single names and obligations, baskets and portfolios of credits and index trades.
Notional amounts of interest rate derivatives outstanding, grew almost 10 percent to $382.3 trillion in the second half of 2007 from $347.1 trillion at mid-year 2007. For the year as a whole, interest rate derivatives notionals rose 34 percent from $285.7 trillion. For the purposes of the survey, interest rate derivatives include interest rate swaps and options and cross-currency interest rate swaps.
Notional amounts of equity derivatives reached $10 trillion at year-end 2007, which represents an annual growth rate of 39 percent from $7.2 trillion at year-end 2006. This number remained flat between mid-year and year-end 2007. Equity derivatives for purposes of the survey comprise equity swaps, options, and forwards.
“As ISDA’s Year-End 2007 Market Survey highlights, the privately negotiated derivatives business continues to grow. While the amounts at risk are just a fraction of notional amounts, these give us a good sense of market activity,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “Developing tools to manage counterparty credit is an important feature of ISDA’s work. Equally important are our efforts to reinforce the operational infrastructure to enable scalable growth and improve and liquidity for the continued development of these important risk management tools.”
The above notional amounts, which total $454.5 trillion across asset classes, are an approximate measure of derivatives activity, and reflect both new transactions and those from previous periods. The amounts, however, are a measure of activity, not a measure of risk. The Bank for International Settlements (BIS) collects both notional amounts and market values in its derivatives statistics and it is possible to use the BIS statistics to determine the amount at risk in the ISDA survey results.
As of June 2007, gross mark-to-market value was approximately 2.2 percent of notional amount outstanding. In addition, net credit exposure (after netting but before collateral) is 0.5 percent of notional amount outstanding. Applying these percentages to the total ISDA Market Survey notional amount outstanding of $454.5 trillion as at December 31, 2007, gross credit exposure before netting is estimated to be $9.8 trillion and credit exposure after netting is estimated to be $2.3 trillion.
The ISDA Year-End 2007 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of December 30, 2007. All notional amounts have been adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 91 firms provided data on interest rate swaps; 81 provided responses on credit derivatives; and 83 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.
http://www.isda.org/ [see under Press menu]
Note: This is all private (OTC) derivatives trading so is unregulated (by governments) and tax free at an annual volume > $500 trillion.
April 27th, 2008 at 3:21 pm
More pertinent video on YouTube in 5 Parts. Jon Moulton of private equity firm Alchemy Partners, London, explains how the banks were involved in Mark’s part 3 “The Crime”.
Search YouTube for “How Banks Bet Your Money”
http://www.youtube.com
May 1st, 2008 at 7:50 am
The UK banks have not raised anywhere near enough new capital yet. More evidence below.
Bank of England sounds alarm on £5bn commercial property defaults
By Edmund Conway, Economics Editor
Last Updated: 10:27am BST 01/05/2008
Britain’s big banks stand to lose as much as a fifth of their profits as the commercial property market implodes, the Bank of England has warned.
Banks have reported no major write-offs from the slump. The Bank of England warned this will not persist
The Bank sounded the alarm on a £5bn-plus wave of real estate defaults which could engulf the financial sector before it has even recovered from the sub-prime crisis.
It used today’s Financial Stability Report to warn that, despite falls of more than 15pc in commercial property prices, banks have continued to pile into the sector and could now face significant losses.
Although it predicted the global financial crisis may soon be at an end, it warned that banks may have to weather losses from other sources.
The office and professional building market is in the midst of its biggest crash in more than a decade. However, banks have reported no major write-offs from the slump. The Bank warned this will not persist.
advertisement
It projected that if a tenth of outstanding commercial property loans default this could cost the UK banking sector £5.1bn, or 19pc of its annual pre-tax profits.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/01/bcnbanks101.xml
May 4th, 2008 at 4:41 am
Is the Credit Crisis Really Over? Minsky Would Say No
http://www.nakedcapitalism.com/2008/05/is-credit-crisis-really-over-minsky.html
EXTRACT: A particularly persuasive reading comes from Doug Noland at Prudent Bear. A student of Hyman Minsky, he takes his theory of “Monday Manager Capitlaism” one step further into “Financial Arbitrage Capitalism,” which means that the inmates are not merely running the asylum, they’ve learned how to position themselves not as crooks, but as prison facilities managers, expand their operations to other locales, and secure government funding.
In all seriousness, the problem that Noland alludes to is that finance is now driving the real economy. And given how speculative our financial system has become, this is leading to poor capital allocation and increased volatility, both of which will dampen growth. Keynes considered reducing volatility to be a major goal of policy, since it would lower the risk premia investors required, and more favorable interest rates would promote greater investment and with it, growth (note that Keynes did not propose the countercyclical measures that have become associated with his name). But high volatility produces the reverse effect: investors demand higher returns to compensate for heightened risk, which reduces invesment. But traders find it hard to make money in quiet markets; a certain level of fluxuation is their friend. So Wall Street’s interests can and increasingly do conflict with those of Main Street.
An excellent overview of what’s really going on. To me it smells, feels and tastes like it’s a pretty accurate analysis. The solution is to apply a tax to all forms of derivatives creation and trading but no-one seems game to take on the financial community so directly . Is it really because financial games are now more important than the real economy and govs are just too scared to upset them? Tim
May 5th, 2008 at 9:24 am
Auction rate securities unwinding
Interactive graphic: How a dearth of liquidity and loss in confidence caused the collapse of the $330bn market
http://www.ft.com/cms/s/91dc5810-15f3-11dd-880a-0000779fd2ac.html
May 6th, 2008 at 9:46 am
Wake-up call for USA. Serious stuff.
Economic Internalionalism 101 (for US Presidential Candidates)
EXTRACT:
Many of the measures that are required to make a lasting, substantive contribution to the standards of living of the modal American worker will take years or even decades to implement.
Much of the US transportation infrastructure is rubbish and overly dependent on road transport. A serious increase in infrastructure investment, most of which will have to be publicly funded and ultimately paid for through higher taxes or lower public spending elsewhere, is long overdue. This will take at least a decade to have a noticeable effect, even if we were to start today.
Not only does America’s infrastructure encourage and subsidise unsustainable transportation methods, American production technology in general, and the products it makes tend to be overly energy-intensive. That is not surprising. Even in California, ‘gas’ or petrol sells for under $4.00 a US gallon. In London, UK, a US gallon of gas costs over $8.00. A $4.00 additional Federal tax on a gallon of gas would help kick the US into the 21st century. Commensurate tax increases on other uses of greenhouse gas emitting substances (e.g. those used for heating, cooling, power generation etc.) would also have to be implemented. To avoid a contractionary effect on aggregate demand, the carbon tax increase could be returned to US households as a progressive cut in income taxes. With domestic incentives better reflecting current and future global resource scarcity, it is more likely that US industry will produce goods and services the world will actually want to buy. This will take years, even decades, to percolate through from the design stage to the production line and the shelves of foreign distributors.
The competitive edge the US used to have over the rest of the world because of the quality of its labour force, reflecting the excellence of its educational system has been eroding steadily. In my own professional universe, the best US universities, especially those with research-oriented graduate and professional schools, continue to be world leaders. But they are increasingly islands of excellence in a sea of mediocrity. The US state-funded high school system provides far too many of its students with a sub-standard education that prepares them, at best, for menial labour. We know from the UK experience that simply throwing more money at a publicly funded sector (be it health, education or the military) does very little to improve its efficiency and productivity. Most of it will simply disappear as rents for the incumbent producers. The incentives and inputs of the producers (teachers and heads) and of the consumers (pupils and parents) need to be changed to get better performance. This will take at least a generation to implement.
——-
http://blogs.ft.com/maverecon/2008/05/economic-internalionalism-101-for-us-presidential-candidates/
May 13th, 2008 at 5:20 am
Who wants credit? No one
A (slightly messy) Chart of the Day – corporate demand for credit goes the way of consumer lending and mortgages. It comes from the ECB’s lending survey for April – a publication that Robert Self, banking analyst at Credit Suisse, likes to keep a close eye on, since credit cycles have tended to correlate tightly with lending standards.
http://ftalphaville.ft.com/blog/2008/05/13/13000/who-wants-credit-no-one/
May 15th, 2008 at 8:44 am
Average French household debt was 47 percent of gross domestic product in the third quarter of 2007, compared with 59 percent for the euro zone and 97 percent in Britain, according to Standard and Poor’s.
http://www.iht.com/articles/2008/05/14/business/house.php
I hope S&P at least got this data correct! [Tim, France]
May 20th, 2008 at 11:10 am
Here we go:
Credit Default Swaps Losses Estimated at $150 Billion
There is piece on Bloomberg this morning, that uncharacteristically lacks a news hook on counterparty risk in the credit default swaps market.
The story argues that the other shoe may finally drop in the $62 trillion CDS market due to rising junk bond defaults. We’ve long seen that market as a disaster in the making. With economic exposures estimated at 2% of notional amount, $1,2 trillion is at risk, making it larger than the subprime market. Thus the $150 billion in losses estimated by BNP Paribas analyst Andera Cicione is plausible.
http://www.nakedcapitalism.com/2008/05/credit-default-swaps-losses-estimated.html
May 22nd, 2008 at 2:59 am
Smoking Gun (the URL says it all)
http://www.portfolio.com/views/blogs/market-movers/2008/05/21/a-new-moodys-rating-scandal?rss=true