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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°135 ▪ 01st March 2018



The SRM activation for the third largest bank in Latvia reveals double standards within the European Banking Union!

On Saturday February 24th, the European Central Bank (ECB) has declared that Latvia’s ABLV Bank is on the verge of collapse and must be closed down. The news of ABLV Bank’s demise amid accusations that it has served as a “major money laundering institution” comes just a week after the head of the country’s central bank was arrested on separate charges of bribery. The ECB said in a statement on Saturday that ABLV, which is Latvia’s third largest bank by assets, is “failing or likely to fail”, as is its Luxembourg-based subsidiary, ABLV Bank Luxembourg. “Due to the significant deterioration of its liquidity, the bank is likely unable to pay its debts or other liabilities as they fall due”, the Frankfurt-based central bank said. “The bank did not have sufficient funds which are immediately available to withstand stressed outflows of deposits before the payout procedure of the Latvian deposit guarantee fund starts”, it added. It said Europe’s Single Resolution Board decided that action by the central bank to shore up ABLV, “was not in the public interest”, so it will be dissolved under Latvian law.

ABLV, for its part, has assured that it took the necessary measures to improve its liquidity last week, notably by adding some “EUR 1.36 billion in four working days” to its coffers in order to reassure the ECB. “It was quite enough for the bank to resume payments and honour all its commitments to its customers, but due to political considerations, we were not allowed”, the banking group said in a statement quoted by the Baltic News Service agency. The financial situation of ABLV Bank suddenly deteriorated at the end of last week after the decision by the United States Treasury Department on February 13th to designate the Latvian bank as a “major money-laundering institution”, involved “large-scale illicit activity connected to Azerbaijan, Russia, and Ukraine. The bank also stands accused of facilitating funding for illegal weapons development programs in North Korea.

The difficulties for ABLV come at a time when a political and financial scandal is brewing at the country’s central bank. Indeed, Ilmars Rimsevics, the governor of the Lativa’s central bank has been suspended from his office on suspicion of corruption. Mr. Rimsevics was arrested by agents of Latvia’s National Anti-Corruption Bureau on February 17th and questioned for several hours in relation to allegations that he accepted a bribe of “no less than EUR 100,000”. Mr. Rimsevics, who also sits on the board of the ECB, protests his innocence and has accused other Latvian banks of orchestrating a campaign against him.

Since the United States Treasury Department opened its investigation into ABLV, the bank has had its access to the financial system cut, which in the short term threatened its survival despite a comfortable financial situation. At the end of 2017, ABLV had nearly EUR 1.7 billion in cash, for a balance sheet total of EUR 3.6 billion. The bank was formally pronounced as bankrupt in Brussels by the Single Resolution Mechanism (SRM), an institution set up in January 2016 and responsible for organising the orderly bankruptcy of troubled banks in the euro area.

At the end of the day, it the mission of the SRM is to place the financial burden more on the banking sector than on the European Member States, the fact remains that this is the first time that this mechanism will operate. Even the Italian bank Monte dei Paschi was saved by the Italian authorities because the bank was judged too big to fail. If the SRM is really activated, the European authorities will not be long in welcoming the success of the creation of the SRM. The reality is that the SRM only works because ABLV Bank is the third largest commercial bank in Latvia, and thus without any systemic risk for Europe. This context reveals double standards within the European Banking Union…

Julien Moussavi, Head of Economic Research



Sovereign Risk


France is really back!

On Wednesday February 28th, the French National Institute of Statistics and Economic Studies (Insee) published the second estimation of the French growth figures for 2017, with real GDP growth reaching 2.0 % in annual average, instead of 1.9 % in its first estimate. At the same time, consumer prices rose by 1.2 % last year. This result is due to more dynamic growth than expected in the first quarter of 2017, when GDP increased by 0.7 %, instead of 0.6 %, said the public French body. The estimate for the three other quarters remains unchanged.

For 2018, Insee has not yet published a forecast. But according to the OECD, growth should remain at a similar level this year – +1.8 % – while the IMF is betting on +1.9 %. In its draft budget, the government has for its part forecast a rise in GDP of 1.7 %, without however dismissing a possible pleasant surprise.

However, we must keep in mind that this figure can still be revised upwards or downwards at the end of March and again at the end of May according to Insee.

Sources: Beyond Ratings, Insee



Per un pugno di dollari !


Corruption Perceptions Index Trend

On February 21, Transparency International published its yearly Corruption Perceptions Index. This index presents scores of perceived levels of public sector corruption according to experts and businesspeople using a 0-100 scale (with 0 being higly corrupt and 100 very clean). This year’s top countries are New Zealand(89), Denmark(88), and Finland(88), and worst countries are Somalia(9), South Sudan(12), Syria(14) and Afghanistan(15).  On average, Western Europe is less corrupt than other regions and has changed little, while the Asia and the Pacific region has improved the most. But this snapshot hides individual country dynamics. For example, while the Czech Republic and Cyprus reach the same CPI (57), their their historical trends are going in opposite directions: the former (Czech Republic) increased its score of 8 points between 2012 and 2017 whereas the latter lost 9 points during the same period. An identical situation appears for Bahrain/Guyana, Hungary/Greece and Syria/Afghanistan pairs. This index is criticized because it only reflects an opinon and is not necessary figure-based. However, as we wait for the publication of SDG 16.5 (Substantially reduce corruption and bribery in all their forms) data in 2019, we can bet a fistful of clean dollars about its relevance.

Sources: Beyond Ratings, Transparency International


Carbon/Climate Change

Rising trends in renewable energy investment in 2017?

Global Trends in Renewable Energy Investment

Source: Frankfurt School (FS-UNEP) Centre/Bloomberg New Energy Finance (BNEF)

Note: Investement volume adjusted for re-invested equity. Total values include estimates for undisclosed deals.

In 2016, global renewable energy investments – solar, wind, biomass and waste, biofuels, geothermal, marine and small hydropower of less than 50MW – suffered their largest drop to USD 241.6 bn, down 23% from 2015. According to the FS-UNEP and relayed by the IRENA, this fall was mainly led by the global decrease of investments in solar and wind, totalling respectively USD 113.7 bn (down 34%) and USD 112.5 bn (down 9%).

China reduced the most its investments in renewables to USD 78.3 bn (down 32%), though still holding the largest contribution. With a 3% rise to USD 59.8 bn, Europe led the only regional increase compared to 2015 records.

This downward trend may be transitory. Published in January 2018, the BNEF’s annual Clean Energy Investment Trends suggests investments in renewables could have risen again in 2017. Solar investments increased to USD 160.8 bn (up 18%), along with a decrease in the price of the technology that reached 25% on 2015-2017. Even though wind energy investments continued their fall to USD 107.2 bn (down 5%), offshore wind still attracted the biggest deals of 2017.

Interestingly, China is leading again this 2017 investment boom, with a 58% increase in solar to USD 132.6 bn.

Sources: Beyond Ratings, IRENA, Frankfurt School-UNEP/BNEF




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