S&P Downgrades Qatar To AA-, Credit Risk Spikes To 2017 Highs

Citing expectations of notable slowing in economic growth andconcerns about fiscal and current account deficits widening, S&P has downgraded Qatar from AA to AA- as credit risk premia hit 2017 highs.

Qatar credit risk is at 2017 highs (but remains well below Jan 2016 recent highs...

Full Statement from S&P...

• On June 5, 2017, a group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links with Qatar.


• We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on economic growth and fiscal metrics.


• We are therefore lowering our long-term rating on Qatar to "AA-" from "AA" and placing it on CreditWatch with negative implications.


• The negative CreditWatch encompasses numerous downside risks to the rating as a consequence of recent events, reflecting that we could lower the ratings if domestic political risks were to substantially increase or if government indebtedness increases materially quicker than we currently expect. We could also lower the ratings if our assessment of contingent liabilities from the banking system or the government"s related entities were to increase, or if Qatar"s external financing lines were withdrawn.

RATING ACTION

On June 7, 2017, S&P Global Ratings lowered its long-term rating on the State of Qatar to "AA-" from "AA" and placed the rating on CreditWatch with negative implications. The "A-1+" short-term rating was affirmed. The Transfer & Convertibility assessment is "AA".

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the State of Qatar are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2017 EMEA Sovereign, Regional, And Local Government Rating Publication Dates published Dec. 16, 2016, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a significant geopolitical development impacting creditworthiness. The next scheduled rating publication on the sovereign rating on the State of Qatar will be on Aug. 25, 2017.

RATIONALE

On June 5, 2017, a group of states including Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links, with Qatar. The measures imposed include  a blockade of land, sea, and air access and the expulsion of Qatari officials, residents, and visitors from the group of states. We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on its economic growth and fiscal metrics. The negative CreditWatch encompasses numerous downside risks to the ratings as a consequence of recent events. At this stage, we note that there are numerous uncertainties regarding Qatar"s response, the extent to which these measures will be imposed, and their longevity. We expect to review this and the potential impact on our projections as further details emerge and by our next scheduled review, on Aug. 25, 2017.

We understand these moves to be motivated by Qatar"s apparently more conciliatory stance toward Iran amid allegations that Qatar is financing terrorist activity. We note that Qatari authorities vigorously  deny these allegations, and that Qatar"s exact policy response is uncertain at the moment.

Supporting the ratings, Qatar holds the third-largest proven natural gas reserves in the world, and is the largest exporter of liquid natural gas (LNG). We expect Qatar"s reserves to provide many decades of  production at the current levels. GDP per capita is among the highest of rated sovereigns, estimated at US$62,500 in 2017. The hydrocarbon sector contributes about 50% of Qatar"s GDP, 90% of government revenues (oil and gas taxes and royalties, plus dividends from Qatar Petroleum), and 85% of exports.

Nonresident deposits in Qatar"s banking system increased over 2016 by 17% of GDP, which has weakened Qatar"s external liquidity position as related external short-term obligations have increased (see our ratio of gross external financing needs); the average maturity of these deposits is under one year. Over the same period, bank credit directly to the government increased by a similar amount, and the funds were generally used to finance Qatar"s ongoing significant infrastructure program. This dynamic has therefore increased pressure on our external stock metric (narrow net external debt), as the increase in external liabilities was not matched by external liquid assets. While we no longer expect the continued accumulation of these external liabilities, in our opinion recent events have the potential to destabilize these nonresident deposits and provoke an outflow.

Although we do not expect this potential outflow to pose immediate and significant issues for Qatar"s banks (see "A Sharp Rise In External Debt Leaves Qatari Banks More Vulnerable," published May 8, 2017), it could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of QIA (Qatar Investment Authority, the sovereign wealth fund) assets, in addition to the central bank"s contingency reserves. Moreover, we now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar"s pegged monetary arrangement. We subtract Qatar"s monetary base from usable reserves, which we view as consistent with maintaining confidence in a pegged currency. We estimate government liquid external assets to be worth 170% of GDP, which remains a key rating support.

Qatar"s fiscal and current account deficits could widen as related revenues from regional trade diminish. In 2016, 10% of Qatar"s exports was to the group of states that have blocked trade. We believe this figure includes gas exports through the Dolphin pipeline, the position of which under the embargo is currently unclear. The same group of states provides 15% of Qatar"s imports, potentially causing substantial shortages of key materials, including those used for construction projects, and food. Furthermore, the imposition of air travel restrictions could have significant implications for Qatar Airways" profitability. We note that debt of government-related entities (GREs) accounts for approximately 85% of GDP. There is currently no indication that Qatar"s main trade partners (Japan, South Korea, China, and India), who purchase the bulk of Qatar"s LNG production, will reconsider their existing trade arrangements. These four countries account for 55% of Qatar"s total exports.

Although still very strong, the government"s net asset position (net general government assets are 120% of GDP) could weaken as a result of deploying these assets to support revenue shortfalls and  because the potential for debt financing at similar prices to recent issues appears unlikely. Additionally, government support to the banking system (as was the case during the financial crisis) and to its GREs, which also require external financing, could place an additional burden on government assets. These developments could weigh on our external analysis to the extent that they act as a drain on liquid external assets and reduce coverage of external debt. At the moment, we expect that Qatar will continue with its substantial infrastructure development, the bulk of which is not related to the 2022 World Cup, but rather developing road and sewerage networks, schools, and public transportation networks.

As a result of these factors, we expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes.

The policy response of Qatari authorities to falling oil prices since 2015 has been very visible and is illustrated by reigning in current expenditures, merging line ministries, and implementing numerous cost-saving initiatives within its core GREs. In comparison with regional peers, fiscal deficits have been modest as a result and their financing strategy clear. In our opinion, the government has been clear with its stated ambitions on economic diversification and its supporting infrastructure development plan. We do not expect that the aims of the authorities will deviate as a result of the embargo, but that achieving them while maintaining the current level of creditworthiness will now require additional fiscal effort, which therefore raises some uncertainty on the exact policy response. We expect details to emerge in the next few weeks. We do not consider the recent lifting of the moratorium on Qatar"s North Field in our assessment because the potential related revenues fall outside of our rating horizon. Less certain still, in our opinion, is Qatar"s policy response to the apparent demands of the group of states and Qatar"s position in the Gulf Cooperation Council. We view these factors as damaging to overall policy predictability.

We believe the fixed exchange rate of the Qatari riyal to the U.S. dollar leads to limited monetary flexibility, and we expect the currency peg to be maintained. Qatar"s real effective exchange rate has appreciated by 14% since early 2014. In our view, this represents a deterioration in international competitiveness of the country"s modest tradeables sector and a dampening of nonhydrocarbon GDP growth, absent any offsetting factors such as improved efficiency or technological capacity.

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Interestingly S&P expects the currency peg to be maintained - something the market strongly disagrees with...

Moodys Slashes Ratings On 6 Canadian Banks, Fears Asset-Quality Deterioration, Soaring Household Debt

Amid Poloz-described "unsustainable prices" in various cities, and just days after the collapse of Canadian mortgage lender Home Capital Group and our discussion of the dire state of Canadian savers (and their record household debt), Moodys has cut the ratings on six of Canada"s largest banks because of "ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future."

As a reminder, even Bank of Canada Governor Stephen Poloz noted that Toronto is out control tonight while answering questions following a speech in Mexico City...

"pretty sure recent gains in Toronto home prices were not sustainable and that the city’s housing market had elements of speculation"

"Financial stability is part of the Bank of Canada’s monetary policy decision making, but the central bank’s primary mission is inflation targeting,... it would be odd to use interest rates to target home prices in just one city."

Perhaps Mr. Poloz,  but, as we showed previously, it doesn’t take a genius to figure out that this will end in tears.  Even the big Canadian banks are fretting. “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter warned clients. But the bubble’s deflation would push the city into a fiscal and financial sinkhole.

So that"s the supposed "asset" side, and to show just how bad the debt situation in Canada truly is, here are some more charts which are largely self-explanatory.

And perhaps the most important - and troubling - chart of all:

And of course the bank run at Home Capital Group...

It should hardly be a surprise that Moodys today downgraded the Baseline Credit Assessments (BCAs), the long-term ratings and the Counterparty Risk Assessments (CRAs) of six Canadian banks and their affiliates, reflecting Moody"s expectation of a more challenging operating environment for banks in Canada for the remainder of 2017 and beyond, that could lead to a deterioration in the banks" asset quality, and increase their sensitivity to external shocks.

The banks affected are: Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Canada, National Bank of Canada, and Royal Bank of Canada.

The BCAs, long-term debt and deposit ratings and CRAs of the banks and their affiliates were downgraded by 1 notch, excepting only Toronto-Dominion Bank"s CRA, which was affirmed. The short term Prime-1 ratings of the Canadian banks were affirmed. All relevant ratings for these banks continue to have negative outlooks, reflecting the expected introduction of an operational resolution regime in Canada.

"Today"s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future. Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past." said David Beattie, a Moody"s Senior Vice President.

In the same action, Moody"s affirmed the BCAs, long-term ratings and CRAs of CIBC Mellon Trust (CIBC Mellon), the Fédération des caisses Desjardins du Québec (the Fédération) and Caisse centrale Desjardins.

In view of today"s actions, Moody"s does not expect any upward rating pressure on the affected banks in the near term. However, the Canadian banks" ratings could be revised upwards if macro-economic conditions in Canada improve and the Canadian banks maintain sound financial metrics.

The affected banks" ratings could be downgraded if their fundamentals weaken, as evidenced by an even more challenging operating environment and/or deterioration in their financial metrics.

*  *  *

Here is the full ratings rationale by bank...

Moody"s considers that weakening credit conditions in Canada -- including an increase in private-sector debt to GDP to 185.0% as of the end of 2016, up from 179.3% for 2015 -- present increasing risk to Canadian banks" asset quality and profitability.

This increase has been led by household debt, which is now at a record high of 167.3% of disposable income (as at Q4 2016) and accompanying house price appreciation.

Despite macro-prudential measures put into place by Canadian policymakers in recent years -- which have had some success in moderating the rate of housing price growth -- house prices and consumer debt levels remain historically high. Business credit, the other component of private-sector debt, has also grown rapidly, at a 6.2% CAGR over the past 3 years.

We do note that the Canadian banks maintain strong buffers in terms of capital and liquidity. However, the resilience of household balance sheets, and consequently bank portfolios, to a serious economic downturn has not been tested at these levels of private sector indebtedness.

Toronto-Dominion Bank (TD, Aa2/Aa2 negative, a1); TD"s strong ratings are attributable to its very strong domestic retail franchise -- which generates stable and recurring profitability and its business mix. This strength is due to leading market share positions in many personal & commercial financial services products, where TD typically has market shares in the high teens and holds first or second positions.

TD is the most retail oriented of its Canadian peers, with approximately 90% of earnings coming from retail (combined Canadian personal & commercial, wealth management and US personal & commercial, excluding corporate). While CM income has increased over recent quarters and capital allocated to the wholesale business is rising, we expect that reliance on this inherently volatile source of income will remain relatively modest.

Through acquisition and organic growth, TD has increased its exposure to unsecured Canadian consumer credit risk in recent years. In our view, however, the strength and stability of the earnings from TD"s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. The ratings of TD"s US affiliates benefit from support from the parent, and as such are also affected by this action.

Bank of Montreal (BMO A1/A1 negative, a3); BMO is one of the six major banks in Canada which benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are towards the lower end of the Canadian peer group, BMO has double digit market shares across all significant retail financial services and products, providing scale and recurring earnings power in its home market. In our view, however, the strength and stability of the earnings from BMO"s Canadian personal and commercial (P&C) banking franchise remain the primary credit strength supporting its ratings. BMO has a strong and improving US regional banking presence through BMO Harris, which adds important diversification away from reliance on Canadian P&C earnings. However, BMO does not enjoy the same franchise strength and pricing power in the more competitive US market that it does in Canada. The ratings of BMO Harris and affiliates benefit from support from the parent, and as such are also affected by this action.

Bank of Nova Scotia (BNS A1/A1 negative, a3); BNS is the most internationally active of the Canadian banks with approximately half of its earnings generated outside of Canada. BNS has taken significant measures to increase its profitability that signal a fundamental shift away from the bank"s traditionally low risk appetite. While the bank"s strategic actions are intended to enhance current profitability -- in 2016, BNS reported domestic net interest margin lower than the six largest Canadian banks" average- in our view, they increase the prospect of future incremental credit losses.

While BNS had strategically grown its credit card and auto finance portfolios - both of which are particularly prone to deterioration during an economic downturn and exhibit higher defaults and loss severities than mortgage portfolios -- in recent years, growth in 2016 was flat. In addition, the bank has made a series of acquisitions away from its strong domestic franchise towards higher-growth but less stable international markets. BNS has aspirations to continue to grow its international earnings, which in Moody"s view adds to bondholder risk.

Canadian Imperial Bank of Commerce (CIBC A1/A1 negative, a3); CIBC is the most reliant of the Canadian banks on domestic P&C earnings, which generate approximately 65% of total earnings, excluding Corporate. In our view, however, the strength and stability of the earnings from CIBC"s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings. CIBC has the second lowest proportionate exposure to unsecured and non-real estate secured consumer debt as a percentage of domestic consumer assets (roughly 11.5%), reflective of its very large book of insured mortgages.

CIBC is one of the six major banks in Canada that benefit from the protection of significant barriers to entry and the stability of a prudent regulatory environment. Although its Canadian retail market shares are mid-range relative to its Canadian peers, CIBC has solid double digit market shares across all significant retail financial services and products, providing scale and recurring earnings.

National Bank of Canada (NBC A1/A1 negative, baa1); NBC"s dominant position in commercial banking and strong second place share of market in retail banking in Québec are the primary credit strengths supporting its high ratings. The stability of the recurring earnings power of NBC"s regional retail franchise is, in Moody"s view, highly unlikely to be challenged. That being said, NBC"s asset base (CAD234 billion as of Q1 2017) and national deposit share (roughly 4%) are small relative to the other large Canadian banks whose branch systems are more national in scale. In our view, however, the strength and stability of the earnings from NBC"s Canadian personal and commercial banking franchise remain the primary credit strength supporting its ratings.

While each of the major Canadian banks enjoys the benefits of superior pricing power due to sustainable large market shares in many significant retail and commercial products and services, this is true for NBC only in the context of its regional market, the province of Québec. As such, the challenges in geographic diversification and earnings stability and the Québec credit concentrations offset partially the strength in local market share and sustainability. NBC is the Canadian bank most reliant upon inherently less stable capital markets earnings, which generated 38% of total earnings, excluding Corporate for 2016 (38% for 2015.)

Royal Bank of Canada (RBC A1/A1 negative, a3 ); RBC"s ratings reflect its profile as a strong and diversified universal bank with sustainable leading market shares across many retail products and services in its home market. The stable earnings from RBC"s domestic Personal and Commercial franchise are a key credit strength. RBC has had very low earnings volatility, supported by the stabilizing effect of the recurring profitability of RBC"s solid domestic retail banking franchise.

However, over the past four years RBC has demonstrated rapid growth in its Capital Markets business, led by growth in its US corporate loan book and the repo and securities finance business. We believe that RBC"s US-focused Capital Markets growth strategy increases its exposure to risks that could more rapidly erode its creditworthiness in volatile or adverse market conditions, and is therefore negative for the credit. To date, this risk has been well managed and its performance has been very stable. Maintaining this performance through more volatile markets will be key to RBC"s longer term risk management track record. We do not expect that this business will continue on this growth trajectory, and, in fact, that capital committed to the Capital Markets business will be more constrained.

Management plans to substantially grow the earnings of its recently acquired, California-based private and commercial bank, City National Bank, (deposits Aa3 stable, a2) both organically and through targeted acquisitions. Growth in the City National business presents less credit risk than continued growth in the Capital Markets area, in our view.

The ratings of two affiliates, RBC Capital Markets LLC and RBC (Barbados) Trading Bank Corporation were also affected by this action. In each case, both long and short term ratings were downgraded.

Fédération des caisses Desjardins du Québec (Aa2/Aa2 negative, a1 ); The Fédération is a cooperative entity responsible for governance and oversight activities for Desjardins Group (the Group). It acts as a control and supervisory body over the individual member caisses. The Fédération"s pivotal importance to the Group"s operations and performance, the application of regulatory supervision to the Group as a whole, as well as the strong strategic and financial cohesion among member caisses with a well-developed mutualist support framework, lead us to factor the strength of the Group into the Fédération"s BCA.

The Group has a secure retail banking franchise in rural Québec as well as strong capitalization and limited reliance on wholesale funding. Its regional banking concentration in Québec is offset in part by the Group"s national insurance and wealth management business.

The Fédération"s ratings were affirmed despite the Macro Profile change because Moody"s believes its operations to be largely isolated to the province of Quebec (which has experienced lower house price appreciation than other provinces) and because a large proportion of Desjardins" net income is derived from non-banking sources, such as life and property and casualty insurance.

CIBC Mellon Trust (CIBC Mellon A1/A1 stable, a1); CIBC Mellon is a major player in the Canadian custody market, underpinning its franchise value. The operations and technology platform provided by BNY Mellon lends a further competitive advantage. BNY Mellon is the largest custodian, globally, and its operating platform allows CIBC Mellon to benefit from economies of scale and service not available to its primary domestic competitor.

CIBC Mellon"s risk management and control environment is strong, with an appropriate emphasis on operational risk issues and effective supervision by the joint venture"s owners. CMT does not make loans (other than short-term overdrafts to custody clients) but incurs credit risk through its securities portfolio. The investment portfolio is made up largely of short-duration Canadian government and provincial bonds as well as corporate debt.

CIBC Mellon"s ratings were affirmed despite the change in the Macro Profile because Moody"s believes its custody bank business model is directly unaffected by high consumer debt as it does not lend to consumers.
 

The World's Worst Market-Timer

Authored by Kevin Muir via The Macro Tourist blog,

Today’s post is about the recent Canadian government measures to cool the scorching Toronto housing bubble, but the lesson about government ineptitude will be universal, and I am confident, shared by everyone.

By now, most non-Canadians have heard of Toronto’s out of control housing market, but probably won’t know too much about the specifics. I tried to think up a good way to show the magnitude of the rise, so I made up a chart comparing Toronto’s house index to another housing market widely known to be insane. Fueled by the latest tech boom, San Francisco has experienced a breathtakingly stupid price rise over the past few years.

Well, here are the two cities side by side:

Yup, Toronto housing price appreciation has even outpaced San Francisco! It’s a gong show here in Toronto, no doubt about it.

Last year when Vancouver was facing the same sort of runaway price rise, their government instituted a 15% foreign buyers tax. Like true bureaucrats, they did not think about grandfathering in existing sales that had not yet settled, and instead slapped an out of the blue tax on foreign capital. Not surprisingly, foreigners decided there might be better places to invest than Vancouver.

Many of them came to Toronto.

I am not claiming foreigners are the culprit for Toronto’s out of control rising housing market. I actually think absurdly low interest rates, combined with unscrupulous dealings from companies like Home Capital Group, are more to blame. But Vancouver’s decision definitely sent more money scuttling to Toronto, at a time when supply was already tight. This extra demand sent prices soaring.

Yet this price increase happened in a vacuum. There was so little supply in the winter season that bidders took prices to absurd levels. It’s like when a stock bursts out to new highs and all the stops run in a sickening whoosh.

Real estate moves a lot slower than stock trading, but markets are markets. They all operate on the same basic principles. And what is the best cure for high prices? High prices!

The market would have taken care of this on its own. We were already seeing tons of new supply coming on the market this spring. It just doesn’t happen overnight.

Instead of letting high prices be the incentive for market forces to fix the problem, the government chose to get involved. I can’t say all their initiatives were terrible, but a few of them were beyond brain dead (even for the Wynne government - and that’s saying a lot!). Here’s prominent outspoken critic Garth Turner’s assessment of the situation:

At first blush, it looks like the condo market was the big loser in Thursday’s political assault on the free market. Rent controls on new units will virtually guarantee consistent long-term negative cash-flow for investor-owned apartments. Ouch. And since half of recent condo sales have gone to investors, you can imagine the impact.

The condo trade also relies heavily on assignment clauses – allowing buyers to sell their interest in a unit prior to closing. Given the fact it can be three or four years between making a deposit on an unbuilt unit and actually seeing it registered, assignments make sense. There are whole brokerages dealing in nothing but. So now with intense scrutiny and the CRA involved, any gains are likely to end up being taxed as income. Double ouch.

In case you missed it, Ontario did about what was forecast here. A non-resident (foreign buyer) tax of 15% – or $240,000 on the average detached house. Rent controls on every unit, ensuring landlords cannot stay ahead of inflation. Letting cities tax under-used properties – about $1,400 a month on a 416 SFH.

I am sympathetic to renters who were being priced out of the market, and I understand the frustration of having prices run away from you. But I know that when government gets involved in such a heavy handed manner, it will end badly. The law of unintended consequences will bite them in the ass.

They sat around watching this problem develop for years, and then when it finally spiraled out of control, they rushed in to “fix it.”

It reminds me of the late 90’s when Nortel (and Bell which owned piles of Nortel) comprised more than half of the TSX 60 index and more than 40% of the broader TSX 300 index. Nortel kept exploding higher, and the Canadian stock indexes became an uninvestable farce. Fund managers were getting their ass kicked by the index because most of them could not invest more than 10% in any one stock, yet Nortel kept pushing the TSX indexes to the moon. After the screams from the investing community finally became deafening, TSX index officials acted and created a cap limited index. By the time they got around to implementing it, what do you think happened? You guessed it. Nortel topped and soon that cap weighted index was the last concern on the minds of fund managers.

I suspect the same will happen with the Ontario government’s real estate measures. Prices were already set to slow, and now that the government has intervened, the top is virtually assured. Like your pal that has terrible market timing but you are afraid to tell him because it might ruin your best contrarian signal, governments are the ultimate fade.

Don’t believe me? Have a look at the chart for Home Capital Group. The canary in the coal mine of Canadian real estate has been struggling for air at the bottom of the cage for some time now.

It is ironic that the day the Wynne government announced their measures to cool the housing market, Home Capital Group, one of Canada’s largest alternative real estate lenders, was being taken out back and unceremoniously shot on news they were under investigation by the Ontario Securities Commission for misleading investors. Now here’s a thought - instead of putting in all sorts of new rules to curb housing speculation, how about enforcing the existing ones?

I am straying dangerously into the territory of ranting about what should be instead of focusing on trading what will be. In fact, I am pretty sure I have crossed the line.

So in the hopes of redeeming myself, let’s examine whether there is a trade in here. Assuming I am correct in that the Ontario government has just rung the bell at the top of the Canadian housing bubble, then how do we profit from it? As you can see, the market has already sniffed out the highly leveraged stocks like Home Capital Group. Now some will argue that this is Canada’s Bear Stearns hedge fund moment. Remember back to 2007 when two highly levered Bear Stearns hedge funds ran into trouble with their mortgage backed portfolio? Although many argued the problem was contained to Bear, it quickly spread and soon enough become a nationwide contagion.

Many U.S. hedge funds and other speculators who have heard stories of the vast fortunes made by those betting against American real estate are convinced Canada will replay exactly the same way. These hedge funds are shorting Canadian banks assuming the rot will spread throughout the whole economy. Heck, I even heard of one prominent newsletter writer who thinks he will be covering his CIBC short in the single digits.

Although I have learned to never say never, I doubt Canada will repeat the U.S. playbook. There are so many reasons, but at the crux of the matter is that Canadians are boring. We just don’t run from one side of the boat to the other with the same determination as our American neighbours. Real estate cycles are long drawn out affairs. The American boom/bust was the exception, not the rule.

The bursting of Canada’s real estate bubble will be much less of a pop than most expect. Instead of playing for the big dramatic win, I think a safer way to capitalize on these new developments is by shorting the Canadian currency.

Now that the government has released these targeted measures to curb real estate appreciation, it takes a lot of heat off the Bank of Canada to raise rates. At the margin, this allows the BoC to be much more dovish.

There is a lot more to currency speculation than forecasting interest rate differentials, but for a long time, Canada’s economy has been kept aloft through real estate strength. We have come to think our shit doesn’t stink, and that somehow our economy will be magically able to continue to outperform.

As real estate softens, I doubt this will be the case.

I am a little bit of a US dollar bear, but I am becoming even more bearish on the Loonie. Maybe buying British Pounds, or even Euros, against CAD is the way to play it.

Whatever you do, make sure you keep in mind that the world’s worst market timer (the government) just cried “Uncle.” The proper trade is to assume they will make a mess. A big one.

You know, I thought the Ontario government’s actions were bad news. But now that I reflect on it, maybe it’s not that terrible. When the decline in Toronto real estate comes, the Ontario Liberals will own it. And the public will be furious with them. See, it’s not all bad…

Rand Tumbles After S&P Downgrades South Africa To Junk: Full Text

While CDS markets had largely priced in a downgrade (with levels approaching those of Brazl), FX markets seemed surprised when moments ago S&P downgraded South Africa to junk, cutting it from BBB- to BB+, in the aftermath of last week"s sacking of finance minister Gordhan by president Zuma. The stated downgrade catalyst: "in our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. We assess that contingent liabilities to the state are rising."

As UBS warned on Friday, a junking of South Africa could cause up to $10 billion in outflows, UBS said on Friday. Investment outflows at that level would effectively double South Africa"s current account gap, UBS said. President Jacob Zuma"s midnight ouster of finance minister Pravin Gordhan deepened a financial market selloff caused by political uncertainty that had been brewing all week.

The departure of Gordhan threatens to tip South Africa"s higher profile foreign currency credit rating, currently one notch above so-called junk at BBB-/Baa2, into non-investment grade. Moody"s is scheduled to review the rating next Friday.

UBS said however that a bigger danger lay in local currency debt. Rated two notches into investment grade, South Africa is one of the few emerging economies whose local currency bonds are eligible for Citi"s World Government Bond Index (WGBI), a global benchmark tracked by over $3 trillion worldwide. 

A two-notch cut to local ratings would exclude the country from the index, UBS noted, estimating WGBI-indexed South African bond holdings at $10 billion - just above the country"s 2016 current account deficit of $9.5 billion, or 22 percent of total foreign holdings of South African debt. WGBI membership hinges on investment grade ratings on local debt from both Moody"s and Standard & Poor"s.

"South Africa"s continued inclusion in WGBI rests on a local currency investment grading rating from S&P and Moody"s – presently two notches away," UBS analysts told clients. "Any unwind of these positions could effectively double the expected current account deficit."

Fitch said on Friday that the cabinet shake-up heightened political risk and signalled policy change, and could result in a review of its ratings on South Africa.

And while CDS had largely anticipated the move...

... it came as a surprise to the rand which tumbled to 3 month lows on the news.

* * *

The full S&P downgrade text below:

South Africa Long-Term Foreign Currency Rating Cut To "BB+" On Political And Institutional Uncertainty; Outlook Negative

OVERVIEW

• In our opinion, the executive changes initiated by President Zuma have put at risk fiscal and growth outcomes.


• We assess that contingent liabilities to the state are rising.


• We are therefore lowering our long-term foreign currency sovereign credit  rating on the Republic of South Africa to "BB+" from "BBB-" and the  long-term local currency rating to "BBB-" from "BBB".


• The negative outlook reflects our view that political risks will remain  elevated this year, and that policy shifts are likely, which could  undermine fiscal and economic growth outcomes more than we currently  project.

RATING ACTION

On April 3, 2017, S&P Global Ratings lowered the long-term foreign currency  sovereign credit rating on the Republic of South Africa to "BB+" from "BBB-"  and the long-term local currency rating to "BBB-" from "BBB".

We also lowered the short-term foreign currency rating to "B" from "A-3" and  the short-term local currency rating to "A-3" from "A-2". The outlook on all  the long-term ratings is negative.

In addition, we lowered the long-term South Africa national scale rating to  "zaAA-" from "zaAAA". We affirmed the short-term national scale rating at  "zaA-1".

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA  Regulation"), the ratings on the Republic of South Africa are subject to  certain publication restrictions set out in Art 8a of the EU CRA Regulation,  including publication in accordance with a pre-established calendar. Under the EU CRA Regulation,  deviations from the announced calendar are allowed only in limited  circumstances and must be accompanied by a detailed explanation of the reasons for the deviation.

In this case, the reasons for the deviation are the heightened political and  institutional uncertainties that have arisen from the recent changes in  executive leadership. The next scheduled rating publication on the sovereign  rating on the Republic of South Africa will be on June 2, 2017.

RATIONALE

The downgrade reflects our view that the divisions in the ANC-led government  that have led to changes in the executive leadership, including the finance  minister, have put policy continuity at risk. This has increased the  likelihood that economic growth and fiscal outcomes could suffer. The rating  action also reflects our view that contingent liabilities to the state,  particularly in the energy sector, are on the rise, and that previous plans to improve the underlying financial position of Eskom may not be implemented in a comprehensive and timely manner. In our view, higher risks of budgetary  slippage will also put upward pressure on South Africa"s cost of capital,  further dampening already-modest growth.

Internal government and party divisions could, we believe, delay fiscal and  structural reforms, and potentially erode the trust that had been established  between business leaders and labor representatives (including in the critical  mining sector). An additional risk is that businesses may now choose to  withhold investment decisions that would otherwise have supported economic  growth. We think that ongoing tensions and the potential for further event  risk could weigh on investor confidence and exchange rates, and potentially  drive increases in real interest rates.

We have also reassessed South Africa"s contingent liabilities. This reflects  the increased risk that nonfinancial public enterprises will need further  extraordinary government support. We expect guarantee  utilizations will reach  South African rand (ZAR) 500 billion in 2020, or 10% of 2017 GDP. The  utilizations are dominated mainly by Eskom (BB-/Negative/--), which benefits  from a government guarantee framework of ZAR350 billion (US$25 billion)--about 7% of 2017 GDP. We estimate Eskom will have used up to ZAR300 billion of this  framework by 2020.

South Africa"s energy regulator has capped Eskom"s permitted 2017/2018 tariff  increase at 2.2%--with negative implications for its financial performance.  Eskom will fund the resulting revenue gap via borrowings of up to ZAR70  billion, of which up to half may utilize government guarantees. Other  state-owned entities that we think still pose a risk to the country"s fiscal  outlook include national road agency Sanral (not rated), which is reported to  have revenue collection challenges with its Gauteng tolling system, and South  African Airways (not rated), which may be unable to obtain financing without  additional government support. While governance reforms have proceeded at the  airline, Eskom still has to complete its board appointments and appoint a  permanent CEO. Broader reforms to state-owned enterprises are still being  discussed and we do not foresee implementation in the near term.

South Africa continues to depend on resident and nonresident purchases of  rand-denominated local currency debt to finance its fiscal and external  deficits. We estimate that the change in general government debt will average  4.2% of GDP over 2017-2020. On a stock basis, general government debt net of  liquid assets increased to about 48% of GDP in 2017 from about 30% in 2010,  and we expect it will stabilize at just below 50% of GDP in the next three  years. Although less than one-tenth of the government"s debt stock is  denominated in foreign currency, nonresidents hold about 35% of the  government"s rand-denominated debt, which could make financing costs  vulnerable to foreign investor sentiment, exchange rate fluctuations, and  rises in developed market interest rates. We project interest expense will  remain at about 11% of government revenues this year.

South Africa"s pace of economic growth remains a ratings weakness. It  continues to be negative on a per capita GDP basis. While the government has  identified important reforms and supply bottlenecks in South Africa"s highly concentrated economy, delivery has been piecemeal in our opinion. The country"s longstanding skills shortage and adverse terms of trade also explainpoor growth outcomes, as does the corporate sector"s current preference to delay private investment, despite high margins and large cash positions.

South Africa"s gross external financing needs are large, averaging over 100% of current account receipts (CARs) plus usable reserves. However, they are declining because the current account deficit is narrowing. The trade deficit (surplus in 2016) has seen contraction, but given the small recovery in oil prices (oil constitutes about one-fifth of South Africa"s imports) we could see the trade balance weakening again. We could also see weaker domestic demand and a notable increase in exports from the mining and manufacturing sectors, along with a slower pace of increase in imports.

We believe sustained real exports growth is likely to be slow over 2017-2020 because of persistent supply-side constraints to production. Import growth will be compressed amid currency weakness and the subdued domestic economy. Therefore, we estimate current account deficits will average close to 4% of GDP over 2017-2020. However, South Africa funds part of its current account deficits with portfolio and other investment flows, which could be volatile. This volatility could stem from global changes in risk appetite; foreign investors reappraising prospective returns in the event of growth or policy slippage in South Africa; or rising interest rates in developed markets.

We consider South Africa"s monetary policy flexibility, and its track record in achieving price stability, to be important credit strengths. South Africa continues to pursue a floating exchange rate regime. The South African ReserveBank (SARB; the central bank) does not have exchange rate targets and does notdefend any particular exchange rate level. We assess the SARB as being operationally independent, with transparent and credible policies. The repurchase rate is the bank"s most important monetary policy instrument. Absent large currency depreciations, we expect that inflation will fall back below 6% this year and remain in the target range of 3%-6% over our three-yearforecast horizon.

OUTLOOK

The negative outlook reflects our view that political risks will remain elevated this year, and that policy shifts are likely which could undermine fiscal and growth outcomes more than we currently project.

If fiscal and macroeconomic performance deteriorates substantially from our baseline forecasts, we could consider lowering the ratings.

We could revise the outlook to stable if we see political risks reduce and economic growth and/or fiscal outcomes strengthen compared to our baseline projections.

Congress buries Obama’s public lands rule

3/7/17 – By David Freddoso

The Senate today passed a Congressional Review Act resolution to strike down what’s known as “BLM 2.0” — a last-minute Obama administration rule on how the Bureau of Land Management gathers input and makes planning decisions about public land use.

Of all the CRA actions in Congress so far, this seems like the least discussed and the worst explained — well, maybe not as badly explained as the rule they repealed taking away gun rights from disabled people, but almost.

This rule was a very big deal out West, where most federal land is located. Its critics included Western state and local governments and local stakeholders affected by BLM decisions. The effect of the rule was not so much to increase public input into BLM decisions, as some have framed it, as to place input from people in D.C., New York or Miami on par with that of local authorities and of the people who live near or use the land and actually have to live with the decisions that are made.

Another sticking point: The rule’s prioritization of “social and environmental change” in land use decisions. This is a novelty. BLM’s statutory mandate is a lot simpler: “sustained yield,” and “multiple use,” described by the agency itself on its website as follows:

The BLM’s multiple-use mission, set forth in the Federal Land Policy and Management Act of 1976, mandates that we manage public land resources for a variety of uses, such as energy development, livestock grazing, recreation, and timber harvesting, while protecting a wide array of natural, cultural, and historical resources…

This is one of many late Obama-era rules and regulations that Congress and President Trump have been working to undo using the Congressional Review Act.

One particularly amusing reaction to this CRA action in Congress helps illustrate the importance and the underestimated power of the CRA. It was given to Reuters by an environmental activist, and it echoes many Democratic lawmakers’ comments during the recent flurry of CRA activity:

Some conservation groups said using the CRA to revoke the measure was a “knee-jerk” and unnecessary measure, and that the land planning rule could have been revised by the BLM.

“I struggle to understand why they would waste their time trying to strike down this rule and why not let the administration fix the rule,” said Phil Hanceford of the Wilderness Society.

I can tell you why they used the CRA. When Congress invokes the CRA, it means that no future administration can issue this rule or any like it, until and unless Congress passes a new law. The Congressional Review Act kills bad rules dead.

   
Washington Examiner

Photo credit: AP

CRA: The "Regulatory Game Changer" That Could Wipe Out 8 Years Of Obama Regs In An Hour

After a pompous, liberal agenda was crammed down the throats of the American people during his first two years in office, President Obama suffered staggering losses in Congress for the next six years that cost Democrats control of both houses.  But, heavy Democrat losses, courtesy of an electorate that vehemently rejected a far-left agenda, didn"t stop Obama from continuing to push through countless new rules and regulations from the White House all while pushing his authority to the brink of every Constitutional boundary known to man. 

Of course, the problem with "legislating from the White House" is that all those rules and regulations can be undone by the next administration.  And, as Kimberley Strassel points out in a Wall Street Journal Opinion piece today, a little know tool within the Congressional Review Act could allow Republicans to wipe out 8 full years of Obama"s liberal agenda, with a simple majority vote, all while preventing similar rules from every being recreated by future administrations.

Todd Gaziano on Wednesday stepped into a meeting of free-market attorneys, think tankers and Republican congressional staff to unveil a big idea. By the time he stepped out, he had reset Washington’s regulatory battle lines.

These days Mr. Gaziano is a senior fellow in constitutional law at the Pacific Legal Foundation. But in 1996 he was counsel to then-Republican Rep. David McIntosh. He was intimately involved in drafting and passing a bill Mr. McIntosh sponsored: the Congressional Review Act. No one knows the law better.

Everyone right now is talking about the CRA, which gives Congress the ability, with simple majorities, to overrule regulations from the executive branch. Republicans are eager to use the law, and House Majority Leader Kevin McCarthy this week unveiled the first five Obama rules that his chamber intends to nix.

So, here"s how it works:

But what Mr. Gaziano told Republicans on Wednesday was that the CRA grants them far greater powers, including the extraordinary ability to overrule regulations even back to the start of the Obama administration. The CRA also would allow the GOP to dismantle these regulations quickly, and to ensure those rules can’t come back, even under a future Democratic president. No kidding.

Here’s how it works: It turns out that the first line of the CRA requires any federal agency promulgating a rule to submit a “report” on it to the House and Senate. The 60-day clock starts either when the rule is published or when Congress receives the report—whichever comes later.

“There was always intended to be consequences if agencies didn’t deliver these reports,” Mr. Gaziano tells me. “And while some Obama agencies may have been better at sending reports, others, through incompetence or spite, likely didn’t.” Bottom line: There are rules for which there are no reports. And if the Trump administration were now to submit those reports—for rules implemented long ago—Congress would be free to vote the regulations down.

But, it gets even better:

There’s more. It turns out the CRA has a expansive definition of what counts as a “rule”—and it isn’t limited to those published in the Federal Register. The CRA also applies to “guidance” that agencies issue. Think the Obama administration’s controversial guidance on transgender bathrooms in schools or on Title IX and campus sexual assault. It is highly unlikely agencies submitted reports to lawmakers on these actions.

“If they haven’t reported it to Congress, it can now be challenged,” says Paul Larkin, a senior legal research fellow at the Heritage Foundation. Mr. Larkin, also at Wednesday’s meeting, told me challenges could be leveled against any rule or guidance back to 1996, when the CRA was passed.

The best part? Once Congress overrides a rule, agencies cannot reissue it in “substantially the same form” unless specifically authorized by future legislation. The CRA can keep bad regs and guidance off the books even in future Democratic administrations—a far safer approach than if the Mr. Trump simply rescinded them.

As Strassel points out: "The entire point of the CRA was to help legislators rein in administrations that ignored statutes and the will of Congress. Few White House occupants ever showed more contempt for the law and lawmakers than Mr. Obama. Republicans if anything should take pride in using a duly passed statue to dispose of his wayward regulatory regime. It’d be a fitting and just end to Mr. Obama’s abuse of authority—and one of the better investments of time this Congress could ever make."

CRA: The “regulatory game changer” that could wipe out 8 years of Obama regs in an hour

After a pompous, liberal agenda was crammed down the throats of the American people during his first two years in office, President Obama suffered staggering losses in Congress for the next six years that cost Democrats control of both houses.

But, heavy Democrat losses, courtesy of an electorate that vehemently rejected a far-left agenda, didn’t stop Obama from continuing to push through countless new rules and regulations from the White House all while pushing his authority to the brink of every Constitutional boundary known to man.

Of course, the problem with “legislating from the White House” is that all those rules and regulations can be undone by the next administration.  And, as Kimberley Strassel points out in a Wall Street Journal Opinion piece today, a little know tool within the Congressional Review Act could allow Republicans to wipe out 8 full years of Obama’s liberal agenda, with a simple majority vote, all while preventing similar rules from every being recreated by future administrations.

Todd Gaziano on Wednesday stepped into a meeting of free-market attorneys, think tankers and Republican congressional staff to unveil a big idea. By the time he stepped out, he had reset Washington’s regulatory battle lines.

These days Mr. Gaziano is a senior fellow in constitutional law at the Pacific Legal Foundation. But in 1996 he was counsel to then-Republican Rep. David McIntosh. He was intimately involved in drafting and passing a bill Mr. McIntosh sponsored: the Congressional Review Act. No one knows the law better.

Everyone right now is talking about the CRA, which gives Congress the ability, with simple majorities, to overrule regulations from the executive branch. Republicans are eager to use the law, and House Majority Leader Kevin McCarthy this week unveiled the first five Obama rules that his chamber intends to nix.

So, here’s how it works:

But what Mr. Gaziano told Republicans on Wednesday was that the CRA grants them far greater powers, including the extraordinary ability to overrule regulations even back to the start of the Obama administration. The CRA also would allow the GOP to dismantle these regulations quickly, and to ensure those rules can’t come back, even under a future Democratic president. No kidding.

Here’s how it works: It turns out that the first line of the CRA requires any federal agency promulgating a rule to submit a “report” on it to the House and Senate. The 60-day clock starts either when the rule is published or when Congress receives the report—whichever comes later.

“There was always intended to be consequences if agencies didn’t deliver these reports,” Mr. Gaziano tells me. “And while some Obama agencies may have been better at sending reports, others, through incompetence or spite, likely didn’t.” Bottom line: There are rules for which there are no reports. And if the Trump administration were now to submit those reports—for rules implemented long ago—Congress would be free to vote the regulations down.

But, it gets even better:

There’s more. It turns out the CRA has a expansive definition of what counts as a “rule”—and it isn’t limited to those published in the Federal Register. The CRA also applies to “guidance” that agencies issue. Think the Obama administration’s controversial guidance on transgender bathrooms in schools or on Title IX and campus sexual assault. It is highly unlikely agencies submitted reports to lawmakers on these actions.

“If they haven’t reported it to Congress, it can now be challenged,” says Paul Larkin, a senior legal research fellow at the Heritage Foundation. Mr. Larkin, also at Wednesday’s meeting, told me challenges could be leveled against any rule or guidance back to 1996, when the CRA was passed.

The best part? Once Congress overrides a rule, agencies cannot reissue it in “substantially the same form” unless specifically authorized by future legislation. The CRA can keep bad regs and guidance off the books even in future Democratic administrations—a far safer approach than if the Mr. Trump simply rescinded them.

As Strassel points out: “The entire point of the CRA was to help legislators rein in administrations that ignored statutes and the will of Congress. Few White House occupants ever showed more contempt for the law and lawmakers than Mr. Obama. Republicans if anything should take pride in using a duly passed statue to dispose of his wayward regulatory regime. It’d be a fitting and just end to Mr. Obama’s abuse of authority—and one of the better investments of time this Congress could ever make.”

Via ZeroHedge

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