IMF Warns Of Global Recession

International Monetary Fund Managing Director Kristalina Georgieva made the following statement today following a conference call of G20 Finance Ministers and Central Bank Governors:

“The human costs of the Coronavirus pandemic are already immeasurable and all countries need to work together to protect people and limit the economic damage. This is a moment for solidarity—which was a major theme of the meeting today of the G20 Finance Ministers and Central Bank Governors.

“I emphasized three points in particular:

“First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.

“We strongly support the extraordinary fiscal actions many countries have already taken to boost health systems and protect affected workers and firms. We welcome the moves of major central banks to ease monetary policy. These bold efforts are not only in the interest of each country, but of the global economy as a whole. Even more will be needed, especially on the fiscal front.

“Second, advanced economies are generally in a better position to respond to the crisis, but many emerging markets and low-income countries face significant challenges. They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. We are particularly concerned about low-income countries in debt distress—an issue on which we are working closely with the World Bank.

“Third, what can we, the IMF, do to support our members?

 We are concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact.

 We will massively step up emergency finance—nearly 80 countries are requesting our help—and we are working closely with the other international financial institutions to provide a strong coordinated response.

 We are replenishing the Catastrophe Containment and Relief Trust to help the poorest countries. We welcome the pledges already made and call on others to join.

  We stand ready to deploy all our US$1 trillion lending capacity.

 And we are looking at other available options. Several low- and middle-income countries have asked the IMF to make an SDR allocation, as we did during the Global Financial Crisis, and we are exploring this option with our membership.

 Major central banks have initiated bilateral swap lines with emerging market countries. As a global liquidity crunch takes hold, we need members to provide additional swap lines. Again, we will be exploring with our Executive Board and membership a possible proposal that would help facilitate a broader network of swap lines, including through an IMF-swap type facility.

“These are extraordinary circumstances. Many countries are already taking unprecedented measures. We at the IMF, working with all our member countries, will do the same. Let us stand together through this emergency to support all people across the world.”

Fed Announces Extensive New Measures To Support The Economy

More Ammo from the Federal Reserve.

The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit to American families and businesses. These actions include:

  • Support for critical market functioning. The Federal Open Market Committee (FOMC) will purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy. The FOMC had previously announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
  • Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.
  • Establishment of two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance and the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.
  • Establishment of a third facility, the Term Asset-Backed Securities Loan Facility (TALF), to support the flow of credit to consumers and businesses. The TALF will enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.
  • Facilitating the flow of credit to municipalities by expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wider range of securities, including municipal variable rate demand notes (VRDNs) and bank certificates of deposit.
  • Facilitating the flow of credit to municipalities by expanding the Commercial Paper Funding Facility (CPFF) to include high-quality, tax-exempt commercial paper as eligible securities. In addition, the pricing of the facility has been reduced.

In addition to the steps above, the Federal Reserve expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses, complementing efforts by the SBA.

The PMCCF will allow companies access to credit so that they are better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility is open to investment grade companies and will provide bridge financing of four years. Borrowers may elect to defer interest and principal payments during the first six months of the loan, extendable at the Federal Reserve’s discretion, in order to have additional cash on hand that can be used to pay employees and suppliers. The Federal Reserve will finance a special purpose vehicle (SPV) to make loans from the PMCCF to companies. The Treasury, using the ESF, will make an equity investment in the SPV.

The SMCCF will purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds. Treasury, using the ESF, will make an equity investment in the SPV established by the Federal Reserve for this facility.

Under the TALF, the Federal Reserve will lend on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The Federal Reserve will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. Treasury, using the ESF, will also make an equity investment in the SPV established by the Federal Reserve for this facility. The TALF, PMCCF and SMCCF are established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.

These actions augment the measures taken by the Federal Reserve over the past week to support the flow of credit to households and businesses. These include:

  • The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
  • The expansion of central bank liquidity swap lines;
  • Steps to enhance the availability and ease terms for borrowing at the discount window;
  • The elimination of reserve requirements;
  • Guidance encouraging banks to be flexible with customers experiencing financial challenges related to the coronavirus and to utilize their liquidity and capital buffers in doing so;
  • Statements encouraging the use of daylight credit at the Federal Reserve.

Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.

The Federal Reserve will continue to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.

The Day Of The Hybrid

Last week NAB announced they were to withdraw a capital issue due to market conditions. Today they announced the conversion of 7,500,00 NAB Capital Notes which were issued on 23 March 2015, and issued 35,140,972 fully paid ordinary shares in connection with the conversion at a price of $21.342608.

The original securities were paying 3.5% plus bank bill rate less the tax rate, so would be quite expensive relative to other funding mechanisms. They are also due for conversion no later than 23 March 2022, but had an optional conversion on 23 March 2020, which NAB exercised.

I see some claiming this is a sign of distress, I disagree, it is a convenient and effective method of enhancing capital, ahead of pressures ahead. Yes, it is a conversion, but tagging it a “bail-in” is in my view inaccurate. The share price of the conversion was higher than the market price.

That said, in a falling market NAB shares were down around 10%.

Here is the release from NAB.

Mortgage Bond Sales Flood Market

The financial crisis is now in full swing, and credit markets are at the epicentre of current events, as owners of mortgage bonds and other asset-backed securities try to sell billions of dollars in assets, amid reports that there are significant investor withdrawals from these funds.

Bloomberg reported that Funds who buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.

Further Federal Reserve support, and other Central bank support is being sought. Raises the question, who should be supporting who, and should financial speculators really be bailed out?

Amid the selling, the Structured Finance Association, an industry group for the asset-backed securities market, asked government leaders on Sunday to step in and help boost liquidity in the market.

In a letter to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell, the industry group said that “the future path of the pandemic has significantly disrupted the normal functioning of credit markets.”

The group asked them to “immediately enact a new version of the Term Asset-Backed Securities Loan Facility,” a financial crisis-era program that helped support the issuance of securities backed by consumer and small-business loans. Such a measure, the group said, would help enhance the liquidity and functioning of crucial credit markets.

“The overwhelming supply of securities for sale to meet redemptions has put significant downward pressure on almost all segments of the bond market,” Szilagyi said in the statement.

The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings.

“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”

The best way to obtain favorable prices is to offer a wider range of securities for bid he said, declining to discuss the amount of securities the fund put up for sale.

The AlphaCentric fund plunged 17% on Friday, bringing its total decline for the week to 31%.

“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed-income market,” Szilagyi said

ASIC Re-calibrates Its Regulatory Priorities

In coordination with the Council of Financial Regulators, ASIC will focus its regulatory efforts on challenges created by the COVID-19 pandemic. Until at least 30 September 2020, the other matters that ASIC will afford priority are where there is the risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters.

ASIC is committed to working constructively and pragmatically with the firms we regulate, mindful they may encounter difficulties in complying with their regulatory obligations due to the impact of COVID-19.  

ASIC has immediately suspended a number of near-term activities which are not time-critical. These include consultation, regulatory reports and reviews, such as the ASIC report on executive remuneration, updated internal dispute resolution guidance and a consultation paper on managed discretionary accounts. Stakeholders will shortly be notified of deferred consultation and publications relevant to them. 

ASIC will also suspend its enhanced on site supervisory work such as the Close and Continuous Monitoring Program.

In issuing information-gathering notices, ASIC has provided new guidance to our staff – mindful that many notice recipients may be facing significant disruption.

By taking these actions, industry participants will be better placed to focus on their immediate priorities and the needs of their customers at this difficult time.

Where warranted, relief or waivers from regulatory requirements will also be provided. This will include requirements on listed companies associated with secondary capital raisings and audits. ASIC has already indicated a ‘take no action’ stance in relation to the timing of AGMs until 31 July and the conduct of AGMs by electronic means.  

ASIC will also work with financial institutions to further accelerate the payment of outstanding remediation to customers.

ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating when administering the law.

ASIC will maintain its enforcement activities and continue to investigate and take action where the public interest warrants us to do so against any person or entity that breaks the law. However, it will focus on action necessary to prevent immediate consumer harm, egregious illegal conduct and other time critical matters.

Key business as usual functions will be maintained including registry operations and services, receipt of whistleblower, breach and misconduct reports and general contact points for industry.

Harry Dent & Sean Allison LIVE: The Great Crash Begins…

You will recall I have discussed the possibility of a financial crash with Harry Dent in the past couple of years. This was our last show (which now seems very prophetic!).

In these uncertain times, its important to get as much information as possible to make good decisions.

Harry S. Dent, Jr. is a bestselling author and one of the most outspoken financial editors in America who has developed a unique method for studying the global economies and providing insights to what to expect in the future. 

There is an opportunity to join a web event in which Harry Dent and Sean Allison will reveal the latest research on what is about to unfold in the coming months.

According to the promoter, “you’ll get cutting-edge insights based on real research. Insights which you simply won’t find anywhere else – especially not in the mainstream media”. Here is the link for more information.

https://nz561.isrefer.com/go/hdcb/ormn/

Note: Whilst I am sharing this information through my channels, please note I cannot vouch for the content, nor am I getting any financial benefit from sharing this link. But I always find Harry insightful, so thought this might be of interest.

Government Relaxes Responsible Lending Obligations

The government has announced a relaxing of responsible lending obligations as they pertain to business lending, in order to ensure small businesses can access credit quickly and efficiently in the coming months.  Via Australian Broker.

As it stands, responsible lending obligations don’t apply to lending predominantly for business purposes; however, in order for a loan to fall within this exclusion, a lender is required to undertake due diligence to confirm the money borrowed meets this test.

Now, the government is changing this through providing an exemption from responsible lending obligations for a period of six months, in relation to the credit lenders extend to their existing small business customers so long as:

  • There is an existing borrowing relationship
  • Some proportion of that credit is used for business purposes

The exemption will apply to new credit, credit limit increases and credit variations and restructures.

The government recognised the “environment for small business has changed and continues to evolve with the rapidly-evolving challenges posed by the coronavirus”. 

The revision is intended to enable lenders to move quickly to support small businesses, at a time when prompt action has become more crucial than ever. 

Credit providers regulated by APRA will remain subject to APRA’s prudential standards while the exemption applies, and providers who subscribe to an industry code will remain obliged to abide by that code. 

The Morrison Government has promised it will continue to work with the banking industry and the financial regulators to support Australian jobs and businesses moving ahead.