Food For Thought

Euro Declines Amid Speculation EU Plan for Greece May Falter

April 6 (Bloomberg) -- The euro declined for a third day against the dollar amid speculation that a plan for Greece to obtain European Union and International Monetary Fund help in cutting its budget deficit may falter.

Europe’s common currency also slid versus the yen as Market News International reported that Greece wants to bypass IMF involvement should it require assistance because the conditions would be too stringent. The pound dropped as U.K. Prime Minister Gordon Brown prepared to call an election that polls signaled may fail to result in a majority. The Canadian dollar rose to parity with its U.S. peer for the first time since July 2008 as crude oil traded near a 17-month high.

The report that Greece “isn’t keen on the IMF being involved in any bailout would seem to throw the whole plan into question,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “As an investor, do you really want to hang around and see what’s happening next? The Greece story is definitely a negative for the euro.”

Europe’s common currency weakened to $1.3415 as of 7:17 a.m. in New York, from $1.3484 yesterday. The euro dropped to 126.06 yen, from 127.25. The yen strengthened to 93.97 per dollar, from 94.37 yesterday, when it traded at 94.79, the weakest level since Aug. 24.

Greece has been receiving information from the IMF about the conditions it would impose in return for aid and officials found them to be “tough,” and are concerned that they could result in civil unrest, Market News said, citing Greek officials it didn’t identify. Any package would “be an IMF program decided by the IMF as it happens with each and every country,” IMF Managing Director Dominique Strauss-Kahn said last week.

Brown Sets May 6 Vote as Polls Show Hung Parliament (Update1)

April 6 (Bloomberg) -- British Prime Minister Gordon Brown called an election for May 6, setting up his first nationwide test as U.K. leader in a ballot that may fail to result in a governing majority.

The 59-year-old premier announced the election date at his 10 Downing St. residence in London today after traveling to Buckingham Palace to ask Queen Elizabeth II to dissolve Parliament April 12.

The pound weakened as much as 1.1 percent as an ICM Ltd. poll showed Brown’s Labour Party trailing by 4 percentage points, enough to make it the biggest in the House of Commons. That contrasted with a YouGov Plc survey that had Conservative leader David Cameron’s lead over Labour, which he’s held since late 2007, widening to 10 points from 2 points last month.

“I’m struggling to think of a modern election when we’ve had this degree of uncertainty,” said Stephen Driver, who teaches politics at Roehampton University in London. “It’s going to seesaw backward and forward far more than previous elections. People want a change but they’re anxious about change as well.”

The vote may determine how quickly Britain reduces a record budget deficit and trims a national debt that is set to almost double. Brown says curbing spending too quickly risks a “double-dip” recession. The Conservatives plan immediate cuts. If the election fails to result in either party having a majority, the first so-called hung parliament in 36 years, economists and investors say it might be too weak to fix the U.K.’s finances and may put the top-grade credit rating at risk.

‘Hate Uncertainty’

“The markets hate the uncertainty of the possibility of a hung parliament or the possibility of the political parties having to work in a coalition,” said Mark Wickham-Jones, professor of politics at Bristol University. “If no one is in overall control, it will make cutting the deficit difficult because the politics will push it to one side.”

The pound has fallen 24 percent against the dollar since Brown took office almost three years ago, weakening today to as low as $1.5143. More Britons dropped out of the labor market in the three months to January than at any time since records began in 1971. Labor unions have stepped up strikes, with cabin crew at British Airways Plc walking off their jobs last month.

Canada Bank Chiefs Wary of U.S. Takeovers as Doubts Persist

April 5 (Bloomberg) -- Royal Bank of Canada, Toronto- Dominion Bank and Bank of Montreal, flush with about $18 billion in excess capital and a currency that’s near parity with the U.S. dollar, favor building from within to snapping up troubled banks south of the border.

“Most of our focus is on just building the business through organic growth in a market that we think is going to recover,” Bank of Montreal Chief Executive Officer William Downe told investors March 30.

Canadian lenders are treading carefully after pouring more than $20 billion to expand their U.S. consumer business over the past decade. The banks, leading the world’s soundest financial system according to the World Economic Forum, face pressure from regulators to conserve capital, while some are concerned about the quality of U.S. assets.

“It’s quite simple,” said Downe, 58, speaking at an investor conference in Montreal. “Unless acquisitions fit in with the strategy of the bank; unless they bring the quality of the customers and the quality of the franchise we’re trying to build, we don’t think it’s the right way to grow.”

In the interim, Canada’s fourth-largest bank plans to expand its Chicago-based Harris Bank’s 288-branch network in the U.S. Midwest, increasing business lending and making “small and medium-sized acquisitions over time.”

Royal Bank has spent a year trying to fix its U.S. consumer-banking business, which has contributed to seven straight quarterly losses at the company’s international-banking unit. Canada’s biggest bank recorded a C$1 billion ($998 million) writedown related to its Raleigh, North Carolina-based RBC Bank in April 2009, and is focusing on reviving profit before considering acquisitions.

Lots of Opportunities

“There’s going to be lots of opportunities for many years to come,” Royal Bank CEO Gordon Nixon, 53, said in a March 24 interview in New York. “I’m by no means concerned about missed opportunities.”

“I don’t think there’s a big rush to buy something,” Nakamoto said. “Everything I read about the U.S., it’s a long workout in terms of the economy. Patience is going to be a virtue.”

Canadian banks exceed the minimum regulatory capital ratio of 7 percent as set by the financial services regulator. Canadian Imperial Bank of Commerce leads the country’s eight publicly traded banks with a 13 percent so-called Tier 1 capital ratio. The ratio is a measurement of capital to risk-weighted assets.

Julie Dickson, Canada’s superintendent at the Office of the Superintendent of Financial Institutions, warned banks as recently as last month against using their cash for takeovers or increasing dividends. She said that until new capital rules are established by the end of the year, acquisitions shouldn’t materially affect capital ratios.

“Eventually they’re going to have to deploy the capital because it’s going to be a drag on” return on equity, said John Kinsey of Caldwell Securities Ltd. In Toronto, which owns shares of Canadian banks. “They’re going to have to do something.”

Comments:

We continue to anticipate additional financial problems both in Greece & the UK. Political will to address deficits appears to be lacking.
As a result we expect that the US dollar will rally strongly, as the European sovereign debt crisis reasserts itself.
Also of note is the Canadian regulator warning banks to hang onto their cash despite having the "world's soundest financial system".
If the Canadian system is so sound, why are regulators worried about adequate capital ratios?
The reality, in our view, is that banks with 7 or 10% capital ratios are still leveraged up at 10 to 14:1 ratios. This is excessive leverage in our opinion. An appropriate level would be in the 4 to 5:1 leverage, or roughly 20% TCE.