AS THE SOVEREIGN DEBT CRISIS DEEPENS IN EUROPE AND THE US, WE HAVE TO MAKE SURE THAT THE CHINESE BUBBLE KEEPING THE GLOBAL ECONOMY TURNING DOES NOT BURST

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By TESTCustomwebLP TESTCustomwebLP April 20, 2011 08:47

AS THE SOVEREIGN DEBT CRISIS DEEPENS IN EUROPE AND THE US, WE HAVE TO MAKE SURE THAT THE CHINESE BUBBLE KEEPING THE GLOBAL ECONOMY TURNING DOES NOT BURST

We covered the Chinese bubble back in 2010 and then we said that things could not continue as they were with callable zero bonds at crazy rates that could damage the likes of BBVA who are expanding in that market no end. We said then that banks dealing on Chinese bonds will have to start building reserves to pay for all this action. Now though the central government has finally seen the light and they are moving to sort out their economic situation. Trouble is this means that banks will have to follow.

Central government in China is continuing to tighten monetary controls in an attempt to offset high inflation and excessive liquidity this in turn has the effect of rising the amount that banks need to hand over as reserves. The reserve ratio requirement was increased 0.5% to 20.5% on Monday evening the fourth such increase this year. So what does this have to do with aviation? Well in effect China has just locked down about US$52.48bn of cash that banks would otherwise be able to lend; this in turn increases the pressure on other zones where banks are also increasing capital ratios and where they are looking at further possible defaults. In fact only yesterday the IMF issued a warning stating that exchange traded commodities funds could be the next thing to implode and cause widespread losses.

For financing aircraft, the Chinese banks are not proving currently to be a huge source of dollar capacity. And, as they continue to fill up their balance sheets with a lot of concentrated credit to the Chinese airlines, those carriers are starting to look outside of China for financing. They are reported to be considering everything from export credit, leasing and even capital markets. Although the Chinese carriers face a stumbling block as they don’t carry credit ratings, they are reported to be considering issuing an unrated bond. Read more about this and other aircraft finance news in the next issue of Airline Economics, which is being published ahead of the Paris air show in June.

Meanwhile Greek 2 year bond rates are at 20%. Greece will not last the summer as things stand. BarCap for one has huge Greek exposure so it will be interesting to see how France and Germany deal with this. German central bankers stated yesterday that Greece will default within a two month period, they should know.

In the USA it also looks like the US short-term bond rates are going through the roof and unless something can get agreed in the Senate soon there could be a partial collapse of the system. I do not see how the US can service more than $14tr of debt without raising taxes heavily now which will affect airlines across North America. The real affect though will be on capacity, it will have to fall again so that ticket price gains can be maintained. If ticket prices fall again and capacity continues to increase the US market is doomed to suffer more problems and more chapter 11 fillings unless two or three additional mergers can take place. Keep an eye on AA and US Airways fees. The latter earns big out of troop movements and these will fall over the next few years.

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By TESTCustomwebLP TESTCustomwebLP April 20, 2011 08:47
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