Graphic: Booming Bond Market In Europe

This is a magnificent illustration of what we discussed in Record Corporate Bond Issuance: Where Did All The Money Go? last October.

From Bloomberg Chart of the Day,

``European companies are turning to credit markets after losses stemming from the financial crisis left banks reluctant to lend, cutting off corporations from their primary source of financing, according to UBS AG.


``The CHART OF THE DAY shows the level of corporate bonds in the credit market, in blue, has risen 12 percent over the past year, and bank loans, in yellow, have fallen to the lowest in 13 months. While the euro-region economy returned to growth in the third quarter, banks may remain reluctant to lend for some time, boosting bond issuance further, said Stephane Deo, UBS chief European economist in London.

“One of the key reasons why banks remain cautious about lending are future economic prospects,” Deo said. “New debt now comes disproportionately from markets. This is a very unusual pattern.”

``In the euro area, bank lending accounts for about 70 percent of corporate financing compared with 20 percent in the U.S., according to the European Central Bank. Banks started tightening credit standards in the third quarter of 2007 as a result of the financial crisis, according to ECB statistics.

“Companies that have access to the credit market are better off compared to those that have no access,” Deo said."

Let me add- perhaps the proceeds from global QE programs have been helping boost the liquidity in the system in support of these record bond issuance.

This also implies that a cut in QE would probably negatively impact on the bond markets unless lending from the banking system recovers.

Europe's Cannabis Usage and Drug Decriminalization

The Economist gives us a perspective on the state of Cannabis usage in Europe.


According to the Economist, ``OVER a fifth of Europeans have taken cannabis at some point in their lives, according to new report on illegal drug use from the EMCDDA, the EU's drug-monitoring arm. Over 30% of Danes, French and Italians aged between 15 and 64 have puffed on a joint. But perhaps for Danes it is just a phase: the Italians, Spanish, French and Czechs are most likely to have dabbled with cannabis in the recent past. Levels of cannabis use are still high but may be declining, says the report. Recent studies suggest that the drug's popularity is waning among the younger generation."

While it is good news to know that Cannabis usage have generally been declining especially among the younger generation, what seems noteworthy is that both Netherlands and Portugal, which has partly decriminalized drug use, is shown to have relatively low instance of usage. This defies common objections where legalization would lead to a drug use explosion.

See our earlier related posts:
Drug Decriminalization: Regulation Versus Prohibition,
Drug Decriminalization Caravan Gets Rollin',
War on Drugs: Learning From Portugal's Drug Decriminalization

25 Largest Companies of the World

25 largest companies in the world as compiled by Bespoke Research

According to Bespoke Invest, ``For those interested, we highlight the 25 largest companies in the world. For each company, we provide its country, sector, price (local currency), year to date change, and market cap in dollars. As shown, Exxon Mobil (XOM) is the biggest company in the world and the only one worth more than $300 billion. PetroChina ranks second and is the only other company worth more than $200 billion. The Industrial and Commercial Bank of China is the world's third largest company, giving China two of the biggest three. Wal-Mart and Microsoft round out the top five. The United States still dominates the list with 12 of the 25 spots. China ranks second with four spots. General Electric used to be the biggest company in the world, but it has slipped all the way down to the 18th spot. Google (GOOG) is also on the list at number 22."

Including China Mobile which has been classified under Hong Kong China has 5. Although the others have been spread among Japan 1, Britain 2, Brazil 1, France 1,Switzerland 1, Netherlands 1, and Australia 1.

By region North America has 12, Asia 7, Europe 5 and South America has 1.

What is interesting is that we are seeing more Asian companies in the race among the elite.

CDS Market/Default Risk Ranking: Philippines Maintains 12th Place, Europe Dominates Monthly Laggards

Bespoke Investment gives us a colorful snapshot of the pecking order of the cost of insuring debts of various nations, as measured by changes in Credit Default Swaps.

Based on month to month changes, according to Bespoke, ``Ireland, Austria, Greece, and the UK have seen default risk rise the most over the last month. All have risen close to or more than 100%. US default risk has risen the 8th most at 68%.”

Among the 10 worst monthly performers, notice that except for the US which ranks 8^th, European countries have dominated the field.

While we may not have the sufficient explanation on why the markets have priced in serious jitters to many European sovereign debts, we suspect that this has been related to

1) credit risks concerns via banking exposures to the Balkan States, which had overheated and whose internal bubbles has imploded, and possibly combined with

2) the recent deleveraging which has heightened liquidity strains in economies with accentuated budget deficits as below courtesy of Danske …

We also understand that Europe’s economy has been more dependent on the banking sector than the capital markets relative to the US. And when the cardiac arrest engulfed the global banking industry last October, the region’s banks, which carried substantial toxic instruments, saw its lending flows to the real economy critically impaired.

Thus, credit driven economic slowdown plus accentuated budget deficits compounded with credit risk exposure to the Balkans may have raised the market’s concern over many of the European nation’s default risk.

National CDS Ranking according to prices.

More from Bespoke, ``Since then, default risk has risen for all but two of these countries (Lebanon and Argentina). Below we provide the current credit default swap prices for these countries, along with where they were trading one month ago and at the start of the year. As shown, Argentina, Venezuela, and Iceland have the highest default risk, with Russia not far behind. Germany, Japan, and France all have lower default risk than the US at the moment. It now costs $60 per year to insure against US default for the next five years. While this may not seem high, it was at $8 earlier in the year, and $36 one month ago.”

Nonetheless, the CDS market shows how exposures to toxic papers, credit bubbles or failed government policies have largely impacted national credit ratings.

Hence, to engage in the narrative generalization that emerging markets reflect a similar state to toxic waste papers that prompted this crisis is to engage in a fallacy of division.

What we should watch is how the markets will price US CDS, as the world's reserve currency, to reflect on the market's approval or disapproval of present policy actions. A continued march upward could signify strains in its privileged status.

Meanwhile, the Philippines maintained its 12^th ranking with minor changes relative to the rest, on a month to month basis. That should be a relief.