Fitch Ratings slashed Italy’s credit rating in the wake of the country’s inconclusive parliamentary elections last month, cutting its rating from a solid A- to a worrisome BBB+. The new rating cites Italy’s deepening recession and the likelihood that politicians won’t be able to form a stable government. Fitch also estimates that Italy’s massive public debt will peak at 130% of GDP this year.
UPDATE (5:55 PM ET):
The European Central Bank decided to keep its target rate unchanged at 0.75% in its latest decision, continuing a policy that has done little to save the euro zone from a deepening recession. Although the central bank stepped in to preserve the currency late in 2011, it once again refused to go beyond that role by bolstering economic growth.
Yesterday, outgoing Bank of England governor Mervyn King called on UK legislators (paywall) to split up the Royal Bank of Scotland. The UK government owns 82% of RBS after taking it over in 2008, but King says that regulators severely overestimated its value, and aren’t going to get their money back as things stand. Instead, he suggests, it should be separated into a “good” bank—which could be sold back to the private sector—and a “bad” bank. King argues that the good piece would be more beneficial to the UK economy than RBS in its current form.
Maersk Line, the world’s largest ocean shipping company, has garnered attention for its plan to buy 20 of the world’s largest-ever container ships, called Triple E vessels. They will carry 18,000 TEU (twenty-foot containers), 2,500 more than Maersk’s current largest ships.
Most multinational banks in the US, UK, and European Union have been cutting back on their global operations, trimming costs and reducing activities that they don’t consider as “core” businesses. Even Citigroup—which prides itself on its global presence—has axed some of its consumer-banking operations abroad already and may cut even more, after they took a toll on its profit.
If you’ve become confused following the seemingly endless stream of back-and-forth headlines from Europe, we don’t blame you.
Warren Buffett is the demigod of value investors, and although his conglomerate, Berkshire Hathaway, didn’t have its best year in 2012, Buffett told his investors today in his annual note (pdf) that room for growth is just around the corner. Where, exactly? Buffett had a few pointers for 2013:
The latest unemployment data (PDF) from Europe have more scary news: a “lost generation” of unemployed young people continues to grow. While fewer than 10% of Germans under age 25 are unemployed, a full 62% of young Greeks are out of work, 55% of young Spaniards don’t have jobs, and 38.7% of young Italians aren’t employed. Italy (38.7%) surpassed Portugal (38.6%) in this measure for the first time in January 2013.
The financial crisis was a wake-up call to regulators across the world. It taught them that they were ill-prepared to deal with global contagion. The outcome of that lesson was Basel III, a set of rules that promises better regulation of global banks.
Groupon’s board just fired its CEO, Andrew Mason, the eccentric, party-boy entrepreneur who helped found the company. This wasn’t exactly a surprise; just yesterday, we said that Groupon’s dismal earnings put Mason’s job in jeopardy.
Bruno Iksil, the trader blamed for amassing a massive position that caused some $6.2 billion in losses JP Morgan last year, is under fire yet again. And this time, JP Morgan is actually arguing in his defense. The now defunct remains of Lehman Brothers—at one time, Wall Street’s fourth-largest bank—are trying to draw Iksil into bankruptcy proceedings, alleging that the trader could have had something to do with an event connected with the collapse of Lehman Brothers.
Spain’s Banco Financiero de Ahorros (BFA) reported a loss of €21.2 billion ($27.9 billion) in the fourth quarter of last year. Nearly all of that, €19.2 billion, stemmed from its troubled subsidiary, Bankia (BKIA-ES). Formed after a merger of seven regional banks—or cajas—in 2011, it’s little surprise that Bankia has been destroyed by a Spanish housing bubble and economic downturn; those banks with stronger balance sheets like Banco Santander and BBVA have credited their only growth recently to operations they do outside Spain and Europe.
In July, Mario Draghi, head of the European Central Bank (ECB), promised that the bank would “do whatever it takes” to protect the euro. That set off a six-month wave of “risk-on” sentiment among investors in Europe. But it was based on dubious assumptions. Though the euro zone had made progress on joint banking supervision and rectifying fiscal imbalances between different countries, in reality most investors credited Draghi’s promise, and his program of “Outright Monetary Transactions” (OMT)—where the ECB pledged to support countries in trouble by keeping their borrowing costs down if they asked for aid.
The latest projections on the outcome of the Italian elections indicate that neither Pier Luigi Bersani’s center-left party nor Silvio Berlusconi’s center-right party have won a clear-cut victory in Italian elections that drew to a close yesterday. Bersani squeaked by with a narrow lead in the lower house of the Italian parliament—the Chamber of Deputies. Italian law grants the largest coalition in the lower house enough seats to rule with a workable majority of 55% of seats. But even with the help of technocrat PM Mario Monti’s small following, the pro-reform Bersani lacks enough support to construct a majority in the Senate.
Current state of play (4.15 a.m. ET): Former Italian premier Silvio Berlusconi has signalled he is willing to form a coalition with the center-left bloc that won the majority of the votes in Italy’s lower house. That may solve the problem of a split parliament that could leave Italy politically and economically paralysed.
Moody’s slashed its rating of the UK government today, from a perfect AAA to the lesser designation of Aa1. Though not completely unexpected, the one-notch cut signifies that the UK no longer has a perfect credit risk.
Two weird things are happening in the private equity (PE) world.
As we wrote a few days ago, the US Federal Reserve is hard at work on ways to prevent failing banks from weakening the wider financial system. These proposed measures include higher capital requirements, which are likely to be expensive for banks. But banks are now shifting their attention to another piece of the regulation puzzle: the requirement that banks issue long-term debt.
Shares of Internet search giant Google topped $800 today, continuing their steady climb higher in recent weeks. Interest in Google has appeared almost simultaneously with disillusionment in Apple which, until recently, was the world’s largest company by market capitalization. Although Google and Apple briefly traded in tandem, the companies have been on opposite trajectories since the fall.
It used to be odd for emerging-market firms to scavenge assets in rich countries, but it’s becoming less so. Qatar’s sovereign wealth fund is investing $3 billion to start a new fund that will target distressed assets abroad, reports Bloomberg, joining American and Chinese funds looking to cash in on weakness in global markets. Distressed assets—financial assets of companies that are near or going through bankruptcy—pose an attractive way for investors to enter struggling markets, and more and more financial firms have been positioning themselves to get in on the action.
When JP Morgan lost $6 billion on a bad derivatives bet in its “London Whale” fiasco last year, it wasn’t just unpleasant for the bank, but was also a blow to regulators’ credibility. Banks that don’t properly supervise their own traders are just the kind of thing that regulators—most particularly the Office of the Comptroller of the Currency, according to a longtime investment banker—were supposed to be watching out for.
Still flush with cash from funds raised before the financial crisis, private equity firms are increasingly finding themselves in a pickle. They raised a whopping $702 billion from optimistic investors between 2006 and 2008, when PE firms and their investors were making big bucks off a leveraged buyout (LBO) boom.
An update at 4:05 PM EDT reflects reports that Meredith Corporation is courting Time Inc.
