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Easy Credit Dries Up, Crippling Chinese Cities

August 15, 2013 by

Top luxury clothing stores in this city’s downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city’s business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions.

But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted.

Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city’s car dealerships have failed.

The owner of the city’s largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars’ worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.

“It’s an economic crisis just like the United States has had; just like it,” said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. “There’s no cash, everyone stays home without a job, there’s no way the economy can recover.”

Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of broader troubles that are beginning to afflict the entire Chinese economy. Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets.

The cracks are showing in many sizable cities like coastal Wenzhou, where informal lending, a big part of so-called shadow banking, has dominated for a quarter-century. Cities with economies linked to commodities with falling prices have also been affected, as more people have defaulted on loans. The biggest, most economically diverse metropolitan areas like Beijing and Shanghai seem considerably less affected, but also have many small and medium-size businesses that depend on informal lending.

Lending has collapsed here in northern Shaanxi Province, where it was particularly speculative and frenzied, and where the local coal industry has also been crippled by steeply falling prices.

As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.

“Almost no one will give you a loan,” said a construction executive who gave only his surname, Xie, as he stood next to his white Toyota Land Cruiser outside a project that had been halted.

Although changes are being slowly introduced, state-owned banks have long been allowed to lend only at low, regulated rates barely above the inflation rate, with the total value of loans controlled by quarterly quotas. All over China, these loans go overwhelmingly to large state-owned businesses, government officials and politically connected individuals, who then relend the money at much higher interest rates to small and medium-size businesses in the private sector that need money to grow.

Liu Linfei, a government official from nearby Yulin, stood on a Shenmu street corner in a T-shirt and shorts on a recent weekend afternoon, outside two high-rise hotels where construction had been stopped just before the windows could be installed. He said he had borrowed 600,000 renminbi, almost $100,000, from a bank shortly before the collapse, at an interest rate of 4.1 percent a year.

Mr. Liu then lent the cash to moneylenders here at an interest rate of 10.4 percent, planning to pocket the difference.

Patrick Zuo contributed research.

Article source: http://www.nytimes.com/2013/08/16/business/global/easy-credit-dries-up-crippling-chinese-cities.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Rejection of Deposit Tax Kills Bailout for Cyprus

March 20, 2013 by Leave a Comment

The bailout package, which would have set an extraordinary precedent by taxing ordinary bank depositors to pay part of the bill, led to street protests in this tiny Mediterranean country and set off a wave of anxiety across Europe.

As hundreds of demonstrators gathered outside Parliament chanting antigovernment slogans, lawmakers voted 36 against with 19 abstaining, arguing that it would be unacceptable to take money from account holders. One member who was out of the country did not vote.

Protesters angry at what they saw as a dictate by Germany to enforce harsh bailout terms wielded unflattering posters of Chancellor Angela Merkel, a day after one climbed to the roof of German Embassy and threw down the German flag.

The German finance minister, Wolfgang Schäuble, said Germany “regretted” the vote in Cyprus, but insisted the public outcry “cannot lead us to make an irrational, unsustainable decision.” He said the euro zone as a whole was “very stable,” but cautioned that the situation in Cyprus should not be underestimated. “It is a very serious situation,” he said.

Analysts raised the possibility of a bank run in Cyprus and a cutoff of financing to Cypriot banks from the European Central Bank if the measure did not pass. It is still possible banks might not be able to open on Thursday, when a bank holiday is scheduled to end.

Michael Olympios, chairman of the Cyprus Investor Association, said Parliament’s rejection of the bailout deal “will buy us some time to see if we can come up with a better agreement.”

At issue was a plan for a one-time tax of 6.75 percent on deposits of less than 100,000 euros, or about $129,000 — even though deposits are guaranteed up to that amount in Cyprus and in most other European countries. President Nicos Anastasiades proposed an exemption for depositors with less than 20,000 euros, but that did not calm fears.

A 9.9 percent tax would be levied on Cyprus bank accounts with more than 100,000 euros — many of which contain Russian money that Germany has contended may be of questionable origin. The taxes were meant to raise 5.8 billion euros of the total bailout cost of 10 billion euros, or $13 billion.

Marios Karoyian, the head of the Democratic Party in Mr. Anastasiades’s coalition government, called the bailout terms an “attack” against Cyprus.

“The decision for a haircut is unethical and erodes the foundation of the E.U.,” he said, referring to the European Union. “We’re dealing with raw blackmail that could lead to the collapse of the euro zone.”

Averoff Neofytou, head of the governing Democratic Rally party, added: “We must admit that this will create an economic suicide. We are sending a message to Brussels, Berlin, Frankfurt and Washington: Don’t force us out of the euro.”

The failed vote intensified a showdown between the Cypriot government and its European partners. Mr. Anastasiades has accused them of pressing him to accept an unpalatable deal that hits ordinary savers and pensioners. Officials in Germany and at the International Monetary Fund say they did not tell Cyprus to tax insured deposits but that one way or another, the country must come up with the 5.8 billion euros to secure the bailout.

The managing director of the International Monetary Fund, Christine Lagarde, said earlier Tuesday that she was in favor of modifying the agreement to lower the burden on ordinary depositors.

“We are extremely supportive of the Cypriot intentions to introduce more progressive rates,” she said in Frankfurt.

She had urged leaders in Cyprus to quickly approve the plan reached by European leaders in Brussels last weekend, and complained that critics had not recognized the value of the agreement, in that it would force banks in Cyprus to restructure and become healthier.

Cypriot officials immediately reached for an alternative plan, which included testing whether Russia would be willing to help with a rescue.

Russian officials had reacted furiously to the proposed bank deposit tax, which they said had caught them by surprise, and they were hardly disappointed to see it shot down by the Cypriot Parliament. But it remained unclear on Tuesday night the extent to which Russia might be willing to provide assistance, which some analysts said might be the island’s last hope.

Cyprus officials made clear that they wanted the lines of communication with Moscow open. Soon after the vote in Parliament, Mr. Anastasiades called President Vladimir V. Putin of Russia to inform him of the results.

Mr. Putin’s spokesman, Dmitri S. Peskov, said that the Russian president had expressed concern about the possibility of any measures being adopted that could harm the interests of Russian citizens or businesses, according to the Interfax news agency. The two leaders agreed to stay in contact, and Mr. Putin invited Mr. Anastasiades to visit Moscow at any time.

Russian officials were preparing for talks in Moscow on Wednesday with the Cypriot finance minister, Michalis Sarris, who was expected to request that Russia postpone the maturity date on a 2.5 billion euro loan that it extended to Cyprus in 2011.

After the parliamentary vote, the European Central Bank indicated that it would not immediately cut off emergency cash — without which Cypriot banks probably could not survive. In a terse statement, the central bank said it was consulting with the International Monetary Fund and the European Commission, its partners in the so-called troika of international lenders.

But in a tacit warning that it would not provide assistance forever, the central bank said it would stick to rules that allow lending only to solvent banks. The Cyprus banks, while wobbly, are not yet insolvent.

“The E.C.B. reaffirms its commitment to provide liquidity as needed within the existing rules,” the central bank said.

Contributing reporting were David Herszenhorn from Moscow, Andreas Riris from Nicosia, James Kanter from Brussels, Jack Ewing from Frankfurt and Melissa Eddy from Berlin.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misstated the vote totals in Parliament. The vote was 36 against and 19 abstaining, not 36 against and 19 in favor.

This article has been revised to reflect the following correction:

Correction: March 20, 2013

An earlier version of this article misspelled the surname of president of Cyprus. He is Nicos Anastasiades, not Anastasiadis.

Article source: http://www.nytimes.com/2013/03/20/business/global/cyprus-rejects-tax-on-bank-deposits.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Bucks Blog: It’s Time to Occupy Your Checkbook

November 2, 2011 by Leave a Comment

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site, BehaviorGap.com.

The last few weeks, there’s been plenty written about the Occupy Wall Street protests. As they’ve spread from New York to other cities, it’s been interesting to see people take to the streets to protest everything from bank bailouts to tax policy.

But it’s also made me curious. Does our willingness to protest the bad behavior of the government and corporations distract us from protesting (or even recognizing) our own personal financial behavior?

This question applies to everyone. Regardless of whether you’re marching, or even if you disagree with these groups, I think there’s a lesson to be learned. By focusing on the financial decisions of others — banks, business, government — we risk putting aside our own questionable behavior in the name of trying to make global change.

In some respects, I think it’s easier to focus on what we believe others should do than face our own situations. As W.R. Alger, a Unitarian minister, put it, “We give advice by the bucket, but take it by the grain.”

To be clear, I think there is plenty to be angry about. I think there are things that must change on a national and even international scale. All I am suggesting is that it might help that effort if we ourselves, as the saying goes, try to become the change we want to see in the world. So in addition to marching through cities around the country, I wonder if we can stage a personal version, an “Occupy Your Checkbook” movement.

Last week, I wrote about how difficult it can be for people to figure out where they stand financially. Part of the difficulty comes from an unwillingness to sit down and do the math. Maybe you can outline in detail everything the banks did wrong, but how familiar are you with your own financial situation? Isn’t it time we devoted some attention and passion to our personal finances?

Perhaps it’s time to talk openly about past mistakes we’ve made. Time to take responsibility for our own financial situations and make a plan to improve it. Time to stop buying crap and hoping it makes us happy. Time to stop pretending to be something we aren’t financially. Time to stop trying to keep up with the Joneses, since we all know they’re buried in credit-card debt anyway.

Occupy Wall Street may or may not lead to change. But I know for a fact that if you Occupy Your Checkbook there will be.

Too often I hear people blaming a third party for their financial problems. In some instances (like fraud, theft or medical emergency), we don’t have control. But in many cases, the only person at fault is the one we see in the mirror.

The credit card companies didn’t make you buy that big-screen television. The banks didn’t make you take out a $500,000 mortgage. When it comes to our discretionary financial decisions, we hold full responsibility. How long can we keep pretending that these choices fall on someone else?

So tackle the things that you can control. Figure out exactly how much debt you owe. Work through your budget and understand where your money goes. Ask hard questions about your needs and your wants.

Again, I know these seem like small things in comparison to the other stuff. But be honest with yourself. What’s more likely to have an immediate and direct impact on your life, Occupying Wall Street or Occupying Your Checkbook?

Article source: http://feeds.nytimes.com/click.phdo?i=950b86011b066e796c7738795f72632c

Filed Under: Your Money Tagged With: , ,

Germany Says Creditors Can Be Shielded in Greek Bailout

June 17, 2011 by Leave a Comment

The German government’s previous insistence on what the finance minister called “fair burden sharing” had renewed market jitters by threatening to derail negotiations on a second rescue of Greece, which will be needed to avert another financing crisis next year.

The German compromise was one of several fresh moves in the long-running saga over Greece’s finances that could restore confidence among both taxpayers and investors. Prime Minister George Papandreou on Friday named a new finance minister and other cabinet members at the end of a week of political instability and angry street protests.

Chancellor Angela Merkel and the French president, Nicolas Sarkozy, announced their agreement after a two-hour meeting in Berlin.

“We would like to have a participation of private creditors on a voluntary basis,” Mrs. Merkel said at a joint news conference with Mr. Sarkozy.

“This should be worked out jointly with the E.C.B.,” she added. “There shouldn’t be any dispute with the E.C.B. on this.”

“This is a breakthrough,” Mr. Sarkozy said, referring to the softening of the German position.

Wall Street and European stock markets turned positive on the news and the euro strengthened against the dollar, reversing its earlier decline. Premiums on Greek and other bonds declined after a weeklong rout, according to Reuters.

To stave off an imminent default, Greece needs the next installment of the 110 billion euro, or $155 billion, loan package it received a year ago. That amounts to 12 billion euros. Further out, Greece is most likely to need another bailout — estimated at up to 60 billion euros — because it won’t be able to return to markets next year as initially planned.

The European Central Bank — which itself holds billions of euros in shaky Greek debt — has firmly opposed anything that could trigger what rating agencies call a “credit event,” or default. Mario Draghi, who has been nominated to succeed Jean-Claude Trichet as bank president, testified on Tuesday that the bank could accept including bondholders only if it were “entirely voluntary.”

Mrs. Merkel, who has been weakened politically by a series of local election defeats, now faces the potential for a rebellion in her center-right coalition over the concession.

In addition, like-minded countries that have backed Mrs. Merkel and her finance minister, Wolfgang Schäuble, including the Netherlands, Austria and Finland, could also still protest.

On the other side, countries like France, whose banks are the most exposed to Greece, and the E.C.B., which has been a buyer of last resort for Greek sovereign debt, are afraid of anything that smacks of default. Such a “credit event” could lead to damaging losses for banks and a freezing up of the global credit markets, such as followed the Lehman bankruptcy in 2008.

Officials with the European Union and the International Monetary Fund officials have expressed confidence that an agreement to release the 12 billion euros from the next loan installment could be made at a meeting of euro group finance ministers on Sunday night in Luxembourg, while the question of a second rescue package could be put off until July. But politically, any new rescue package depends on Greece pushing through additional savings to close a widening budget gap — a demand that provoked a government crisis in the country this week.

Another issue that will need to be resolved Sunday is the source of the financing for a second Greek bailout.

Mr. Draghi has indicated that one acceptable option is the so-called Vienna Initiative, named after a 2009 agreement under which international lenders agreed to roll over credit lines and maintain their exposure to Central and East European countries to carry them through the global financial crisis.

On Friday, Mrs. Merkel said the Vienna Initiative was a “good basis” for a solution. Mr. Sarkozy agreed. But neither gave details about how the private investors would work with the International Monetary Fund and the European Central Bank. They said they were waiting for the troika — the I.M.F., the E.C.B and the European Commission — to present its latest report on Greece’s situation.

Stephen Castle reported from Brussels.

Article source: http://www.nytimes.com/2011/06/18/business/global/18euro.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,