Japan’s Debt Crisis a Follow-up Review

March 14th, 2012 | Posted by octafinance in Bonds | Currencies | Europe | Japan | Options - (2 Comments)

This is a continuation of the article “Japan’s debt crisis comes after Europe buy some long term OTM yen puts”

Surprisingly honest, Japanese Ministry of Finance official admits that “Japan is fiscally worse than Greece“. Bloomberg is reporting that, at a conference in Tokyo, Yasushi Kinoshita said “Japan’s 2011 fiscal deficit was up to 10% of GDP and its debt-to-GDP has soared to over 230%”. It seems that Kinoshita is worried that there is a big risk of shocks even with large amount of JGBs that are held domestically. I completely agree with him as stated in my analysis.

And now a former top Japanese currency official:  “The Bank of Japan is locked into purchasing more government bonds and may contribute to a loosening of fiscal discipline in the world’s largest public debt market”. “Since they have come this far, if the BOJ stops purchasing bonds, there will be a fall in bond prices and huge valuation losses for banks.”  said Makoto Utsumi, former vice finance minister for international affairs and now president of Japan Credit Rating Agency Ltd.

BOJ last month increased bond purchases through its asset fund by 10 trillion yen ($123 billion) to $374 billion QE as part of measures to counter deflation and spur growth. That means that BOJ will monetize most of the deficit that Japan has. Don’t underestimate the significance of such program, the Japan’s economy is much smaller than the USA one.

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When to worry about Hyperinflation. Where it could happen?

March 7th, 2012 | Posted by octafinance in Bonds | Currencies | Europe | Japan | Uncategorized - (3 Comments)

While some people are worried whether QE3 will be initiated so they can reap some profits there are others who are worried that hyperinflation might suddenly happen and destroy their wealth.  Because I received a few emails from such nervous investors and businessman from Europe and USA, I have decided to dedicate this post to them and assure them that even though money printing is risky and causes hyperinflation, we have nothing to worry about in Europe and USA.

Hyperinflation is one of the worst systemic risks. People and investors usually avoid holding much cash because they believe that hyperinflation might destroy it and they are partly right in their assessment. The only problem with that assumption is that there are specific causes that result in hyperinflation and cash might be a good option for now, even for those that hold Euros.

There have been 28 episodes of hyperinflation in national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz, (more…)

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Systemic risk and bank failures. Where to keep your cash safe?

November 6th, 2011 | Posted by octafinance in Europe | Japan | Uncategorized - (1 Comments)

I’m writing this because these days the world is extremely unsafe and we must pay attention to not only to what return do we get on our money but also if our money is safe.

Recently MF Global filled for bankruptcy or chapter 11. I won’t go in details but will summarize what happened in few words.

MF Global is among the 10 biggest USA bankcryptcies ever. It’s place is #8.

1. Lehman Brothers Holdings, September 2008: $691 billion in assets

8. MF Global: $40 billion (as of Sept. 30)

MF Global was a waiting candidate for a bankruptcy with the high leverage it had and it was a matter of time until something happaned to take this broker down. MF Global had leverage of 32.8, which corresponds to a real Tier 1 ratio of 3.0%.


Mf Global Q3 2011 – Assets 39 833, Equity 1 214, Leverage 32.8, Tier 1 (%) 3% in billion USD.

So basically it was a matter of 3% drop in it’s portfolio to take down the whole equity and put the broker in chapter 11.

MF Global owned $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation. The Italian debt was about 50% or approx $3 billion. So, with $1.2 billion in capital and $6.3 billion exposure to sovereign debt, it was only about 19% loss on the value of bonds to put the company in chapter 11. Concerns that it might lose money on the holdings led to demands from regulators to boost capital, credit downgrades, margin calls and finally bankruptcy.

Lehman Brothers went bankrupt in September 2008 with a leverage of 32.2.

Before I start doing an analysis of different banks and brokers, I want to tell you how I calculate the equity to get a more accurate leverage (true leverage). It’s is essential to clearly identify the actual amount of equity. For me that’s common equity + accumulated earnings, excluding preferred shares, subordinated and other type of capitals. The assets are  (assets minus the true amount of equity).

According to the old Greenspan, the leverage  should be less than 10.

Today, we should not only look at banks that are too big to fail but to be more safe, we must also hold money in banks and brokers that have low leverage. It’s recommended that the leverage is less than 10.

According to a report of the Financial Stability Board (FSB) from November 4, 2011, the list of systemically important
financial institutions (SIFIs) include banks that will not be allowed to fail. Of course that is if we assume that the host countries of these banks will have the ability to inject capital and recapitalize them. That is another important point to which I will write more below. We face a cycle of sovereign debt crisis, so not only the banks will fail but many countries. A conclusion from a book that I read of  Kenneth S. Rogoff and Carmen M. Reinhart – “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”, in such debt cycle a 50% of the countries default or restructure their debt and it happen in clusters. Many of these countries will have a problem to save the too big to fail banks if they are bankrupt too.

Here is the list of the FSB, and respectively their leverage and true tier 1 capital.

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