There really is no such thing as a sure thing. As of a few weeks ago Basel III, with its aggressive capital and liquidity requirements for banks, seemed to be as inevitable as the seasons. Likewise, US financial reform, i.e., Frank-Dodd, as of June 25 looked like a done deal after Congress pulled an epic all-nighter. But now after a couple of days, some G-20 dithering, a death in the US Senate and a suddenly wavering senator, things don’t appear to be so certain. To add to the uncertainty is worry that the world will fall into another recession. The impact of this uncertainty is also being felt in capital markets: according to a late June Bloomberg story “the percentage of corporate bonds considered in distress is at the highest in six months, a sign debt investors expect the economy to slow and defaults to rise.”
G-20 Softens stance…a bit
In Toronto, according to reports, the leaders of 20 of the world’s richest economies appear to have back-burnered calls for rapid Basel III implementation.
Even though the Basel committee is still on track to release its new rules in November when the G-20 next meets, countries appear to be willing to delay implementation because of the possible effects it could have on a global recovery. They appear to be conceding to banks who across the world have been lobbying hard for a delay or even a rewrite of the proposed rules. They argue that the new standards—which require them to hold more and better quality assets as well as more liquidity—could hamper the financial systems’ immediate search for sounder footing.
The rules would go into effect by the end of 2012 but this could get pushed out with a longer transition period. Mario Draghi, who is chairman of the Financial Stability Board which works closely with the Basel Committee, said Basel III “should provide transition arrangements that enable movement to robust new standards without putting the recovery at risk, rather than allow concerns over the transition to weaken the standards.”
In Europe, also, banks need to manage stress-testing disclosures, which now may be expanded to as many as 100 banks. For MNC treasurers, although these developments provide a large measure of added uncertainty that everyone wants to go away, there is good news in that banks won’t be as quick to see credit tied up in capital and liquidity requirements—or, perhaps, derivatives businesses if Frank-Dodd isn’t passed (see related story above). Though, again, the reason for the “good” news isn’t good: Even China is seeing growth drop more than 4 percentage points. But this being China, the drop-off, we’re told, is “good” news (by Goldman) as it will prevent overheating.
This global trend of economic growth decline will likely add more uncertainty to the market and cause capital markets to be more skittish than they already are. Small wonder, then, as the AFP’s 2010 Liquidity Survey confirms, that companies are still inclined to hold record levels of cash: just 24 percent let cash balances shrink in the last six months.