China says Indonesia buys bonds in interbank market

Reuters, BEIJING, July 23, Mon Jul 23, 2012

(Reuters) - Indonesia's central bank has started buying bonds in China's interbank bond market, expanding financial cooperation between the two countries, the Chinese central bank said on Monday.

China has allowed foreign central banks to invest in its domestic interbank bond market since 2010 as part of efforts to widen investment channels for foreign yuan asset holders and promote the international use of the Chinese currency.

China and Indonesia signed a three-year currency swap deal worth 100 billion yuan ($16 billion) in March 2009 and companies in the two countries are encouraged to accept export and import bills in Chinese yuan.

Besides central banks, China allows yuan clearing banks in Hong Kong and Macau and foreign banks that help settle cross border trade in yuan to trade in its interbank bond market.

The People's Bank of China made the disclosure in a statement on its website, www.pbc.gov.cn.

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When is a bank really trading with its money?

The Jakarta Post,  Jesse Eisinger, International Herald Tribune, New York | Fri, 11/26/2010

The regulatory overhaul of the U.S. financial system that passed last summer scored a big victory: It barred investment banks from wagering with their own capital. Some cynics expect Wall Street to find a way around these rules. By ‘‘some,’’ I  conservatively estimate 99 percent of people who do not work on Wall Street and 100 percent of those who do.

Yes, banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley have been jettisoning hedge funds and other  “proprietary traders’’ to comply with the new edict, called the Volcker Rule.

But there is not a clear and bright line here. Defining proprietary trading is extremely difficult because it is almost impossible to distinguish from making markets. Goldman gets most of its profits from trading businesses, but it says that the majority of such trading is for clients. Regulators are struggling to define this, and investment banks are pouring their lobbying muscle into educating them.

To understand why this task is so hard, it is worth going through an obscure transaction that Goldman Sachs completed in  London this year. The story starts in summer 2008. Bear Stearns had collapsed. The housing bubble was bursting. So was another bubble, in loans to high-risk companies. Banks, which had doled out overly generous loans to high-risk corporations,

would get stuck with losses on many of them.

During this period, Goldman Sachs bundled a bunch of these loans into a special concoction called CELF Partnership— or CELF-interested.

Of the ¤1.5 billion deal, worth about $2 billion today, ¤1.2 billion came from Goldman’s own balance sheet. Goldman whipped the deal out the door in July 2008.

Just two months later, the financial crisis roared to a boil and the assets backing the CELF bonds, like all such investments, wilted. Those who had bought into the CELF deal were sitting on paper losses.

The CELF deal got interesting this year. The big investor in the deal, a Dutch pension fund, wanted out. It owned the AAA-rated portion of the CELF deal.

The investor went back to the underwriter, Goldman, and after an auction, the firm bought the bond from its client. Because the market had declined, the investor took a loss.

In addition to buying the AAA position, Goldman also bought some of the equity, or the bottom part of the deal. The equity carried ownership rights. Goldman bought enough equity to become the majority holder of the deal.

By controlling such a deal, an owner can ‘‘call’’ a deal, or unwind the transaction. When that happens, the assets are sold and the owners are paid in sequence, by their seniority. In other words, the AAA holder gets paid in full first, and so on, down to the equity. We know that Goldman took control of the deal because it issued an obscure notice to the Irish Stock Exchange, saying that it now owned a majority of the equity of the fund. That notice listed the Goldman executive who was responsible for the position: Norman Hardie.

So who is Norman Hardie? Does he run a hedge fund that Goldman is booting out the door? Is he a Goldman proprietary trader? No. At the time, he was in charge of a part of Goldman’s structured finance business. Supposedly, that is a division that serves clients. Yet here he was snapping up big pieces of complex deals, putting his firm’s capital at risk.

Goldman made a bundle on the trade. Even though the CELF assets are not worth today what they were in 2008, therewas enough money that in unwinding the trade, all the debt holders — including Goldman — got paid off in full.

The holders of the equity were left with cents on the dollar. For Goldman, the trickwas that it was worth a small losson the equity to make a big gain on the debt. So Goldman made money and some of its clients took losses. At this point, few would be surprised by that.

Still, as the underwriter, Goldman sure seemed to have been in a unique position to profit. Goldman had a thorough knowledge of the CELF assets and knew all the original investors. But was there anything wrong with what it did?

No.

The important point is that this is a big way that Goldman makes money. Yet Goldman says its CELF trade was not proprietary trading at all. It was all done to help its client. What is more, it paid that client above-market rates.

‘‘Our client decided to sell its investment,’’ the firm said in a statement. ‘‘It took independent advice and ran a competitive sale process. We offered the highest price. This is a good example of helping a client achieve its objective, and underscores the critical importance banks play in using their capital to facilitate transactions on behalf of clients.’’ That is very similar to the arguments that the financial industry’s lobbyists will be making to complicate things for the definers of the Volcker Rule.

In the CELF transaction, Goldman took a big risk with its own money. The problem, exemplified by the financial crisis, was that when banks make those bets, they take their big winnings to the Hamptons but saddle American taxpayers with the losses.

There is a new law to curtail this kind of behavior. Because of the way Wall Street does business these days, it is fair to question whether it will work.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest.

Indonesia Studying Options To Stabilize Debt Market

Jakarta Globe, Faisal Maliki Baskoro, Francezka Nangoy & Dow Jones | November 14, 2010

Jakarta. The government is studying setting up a fund to stabilize bond prices in case foreign investors suddenly start dumping Indonesian assets, the latest in a series of efforts to manage the massive inflow of funds from abroad.

Indonesia’s red-hot bond market has spurred worry over
a sudden withdrawal of capital from foreign investors.
Suggested solutions include a fund for bond purchases
and more investment instruments. (AFP Photo)

“They have that in South Korea where in the case of a reversal, authorities can buy back bonds to stabilize them. We’re still studying it,” Perry Warjiyo, director for monetary policy at Bank Indonesia, said on Friday.

“Bank Indonesia and the Finance Ministry will hold a meeting [this] week to better coordinate our steps in tackling capital inflows,” he added. Perry did not return calls seeking comment.

Indonesia, along with other emerging economies, has seen a surge of inflows into securities such as stocks and bonds as investors from slower-growing countries seek higher yields. The worry is that financial markets would be thrown into chaos should those inflows suddenly reverse. Indonesia, Brazil and other emerging markets are introducing capital curbs to avert financial instability from investors seeking higher-yielding alternatives to near-zero interest rates in the United States, Japan and the eurozone, Bloomberg reported last week.

Finance Minister Sri Mulyani Indrawati, now a managing director at the World Bank, said last week that Asian economies may need to consider capital controls to ease the risk of hot money flying out.

The advice comes after the US Federal Reserve announced it would try to boost the US economy with plans to buy $600 billion in long-term Treasury bonds as a part of efforts known as quantitative easing.

Indonesia’s central bank suspended the sale of its three-month debt papers, known as Bank Indonesia Certificates (SBIs), and started offering a three-month non-tradable term deposit as part of its efforts to reduce risks connected to foreign inflows.

Bank Indonesia officials have also said it was considering extending the mandatory one-month holding period for SBIs if inflows intensify to further keep sudden reversals in check.

Indonesian lenders have started to set aside 8 percent of their deposits — up from the original BI requirement of 5 percent — as primary reserves have been absorbing excess liquidity from the market since early November.

Still, economists are expressing mixed responses over the prospect of such a move by finance authorities.

“I don’t think Bank Indonesia needs to create a special fund for [emergency bond stabilization], because the costs will be huge if it’s not being used. It’s better if they just expand their open market operations onto the bond market,” Purbaya Yudhi Sadewa, chief economist at state brokerage Danareksa Sekuritas, said over the weekend.

Bank Indonesia’s open market operations focus on reducing volatility in the rupiah.

“What Bank Indonesia and the Finance Ministry need to do now is to manage the hot money by deepening and diversifying the market,” said Juniman, chief economist at Bank Internasional Indonesia, referring to offering more varied financial instruments.

Foreign holdings of Indonesian bonds rose 2 percent to Rp 195.7 trillion ($21.91 billion) on Nov. 11 from Rp 191.99 at the end of October, data from the Finance Ministry’s debt management office showed. State foreign exchange reserves increased to $91.9 billion at the end of October from $86.5 billion the previous month, according to Bank Indonesia data.

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Analysis: Emerging market capital curbs may be just the ticket

Reuters, By Sujata Rao, LONDON | Wed Jul 28, 2010 11:32am EDT

(Reuters) - Investors are buying more long-dated bonds and overseas-listed shares in key emerging markets, suggesting capital controls set up in these countries may be helping curb volatile portfolio flows and currency swings.

While it is hard to gauge the net impact of controls set up in some developing countries, the experience of Brazil and Indonesia suggests it is possible to deter big speculative flows or redirect portfolio cash to less volatile assets without necessarily scaring investors off.

Last October, frustrated by a 30 percent surge in the real, Brazil slapped a 2 percent tax on foreign flows into its stocks and bonds. It was followed by Taiwan, Indonesia and South Korea, which have imposed a variety of milder curbs on capital.

Nine months on, investors say they are still putting cash in Brazil while Finance Minister Guido Mantega has been quoted as saying that the levy has changed the "irrational course" of the markets and that the real currency is now less volatile.

Fund managers say the tax has also raised millions of dollars in government revenue.

"Has this tax made my life tougher? Definitely yes. Has it put me off investing in Brazil? Definitely not," said Jose Cuervo, who looks after $6 billion in Brazilian stocks at HSBC.

Cuervo says the 2 percent levy has to be seen against the backdrop of 20 percent-plus corporate earnings growth.

To avoid the tax but still invest in Brazil, he buys American Depositary Receipts in Brazilian firms instead of the underlying Sao Paulo-listed stocks where possible. ADRs are priced in dollars and enable investors to sidestep cross-border and cross-currency transactions.

The tax has also slowed some cash outflows.

"In the past when we sold positions in local bonds we would move returns back offshore into dollars. But now we look to keep the money onshore in Brazil," says Brett Diment, who oversees $5 billion in emerging debt at Aberdeen Asset Management.

Data from Indonesia, another popular emerging market, suggests steps enacted there in June may have helped push out some foreign accounts from short-dated debt.

Jakarta now requires buyers of one-month central bank bonds to hold them for at least 28 days, making the short-term debt less attractive to cut-and-run speculators.

Foreign holdings of six-month Indonesia bills surged 37 percent in July, data shows. As foreigners raised duration, one-month yields rose while six-month and one-year yields fell 25-30 bps.

"The results are in line with what the government wanted: more investors in longer-dated bonds, but at the same time foreign ownership of Indonesian bonds is at a record high," said Standard Chartered currency strategist Thomas Harr.

TOO SUCCESSFUL?

Ironically, investors fear the relative success of Brazil's levy may tempt the government to raise it further.

"Brazil's local bonds are among the most attractive assets in EM, but if the real breaks much higher the market will be concerned about further measures," Diment said.

"So from that point of view (the tax) has been a successful measure in that it is limiting currency appreciation."

Some also worry that countries such as Colombia or Peru could follow Brazil's example.

The Institute for International Finance has cut its 2010 forecasts for emerging market capital flows, citing fear of more controls.

Across emerging markets, flows into equities have dipped from last year's highs and currencies have weakened, while bond flows are at record highs. This is significant as equities are widely seen as a key destination for speculative cash.

Central bank reserve growth, often used for calculating the ebb and flow of hot money, has also slowed. Developing countries' reserves grew $80 billion in the first three months of 2010, IMF data shows, versus a $200 billion jump the previous quarter.

Still, analysts are reluctant to pin these developments entirely on capital controls, noting that the industrialized world's poor growth outlook is weighing on emerging markets and creating a friendlier environment for bonds than stocks.

"In the past whenever G3 growth collapsed, flows to EM have slowed," says Claire Dissaux, strategist at Millennium Global citing 1998 and 2002. "You would have to believe in true decoupling to expect flows to continue at the same level."

Emerging central banks say it is not currencies or portfolio flows that they aim to curb, though, but hot money flitting from market to market in search of yield -- the type of cash that is widely blamed for past emerging market crises.

They may be fighting an uphill battle as emerging interest rates are rising, creating a powerful driver for speculative capital seeking returns in short-term deposits.

But multilateral lenders' surprising endorsement of calibrated controls may be tacit acknowledgement that the curbs do indeed discourage hot money.

A February paper by IMF economists noted "an effect on the composition of inflows rather than the aggregate volume" resulting from such curbs -- just the result the emerging economies are looking for.

(Editing by Hugh Lawson)

Second retail sukuk sell like hot cakes, bids reach Rp 8.03t

Aditya Suharmoko, The Jakarta Post, Jakarta , Tue, 02/09/2010 8:59 AM

Retail Islamic bonds sold like hot cakes, with bids reaching Rp 8.03 trillion (US$851 million), almost tripling initial targets of Rp 3 trillion, when the high-yield bonds were introduced onto the market on Monday.

The Finance Ministry’s director general of debt management, Rahmat Waluyanto, said the ministry would introduce a maximum limit on the purchase of retail sukuk after an investor placed an order worth Rp 25 billion in the bond coded SR-002, which is designated to individual investors.

“We have not yet decided the limit,” said Rahmat, adding the ministry would use the Rp 3 billion limit placed on the retail bonds as a benchmark.

Rahmat said that the investor who bought Rp 25 billion in retail sukuk might shift funds from the currently-shaky stock market.

The ministry wants to develop domestic investors in the bond market to help strengthen the government’s bonds against volatility resulting from the movement made by foreign investors.

The second retail sukuk, designated for retail investors, received a total order of Rp 8.75 trillion, the ministry said. The sukuk offer 8.7 percent yield, maturing in 2013.

The first retail sukuk issued in February last year were also a hit, absorbing a total order of Rp 5.56 trillion, about three times its initial target of Rp 1.77 trillion.

Rahmat said the government still has an option to sell Islamic bonds worth about Rp 17 trillion to help finance the state budget.

He did not mention when the government would conduct the next sale of retail sukuk, but saying that the global sukuk would be launch early in the second half this year to cope with the budget deficit.

“It will be before Ramadan,” he said.

Last month the government sold $US2 billion worth of 10-year dollar-denominated bonds.

Rahmat said the government would also issue yen-denominated samurai bonds sometime in the first half this year to help plug the 2010 budget deficit of Rp 98 trillion.

The ministry also has sukuk sale via auction conducted once a month, said director of sharia financing policy Dahlan Siamat.

Recent upgrades in Indonesia’s ratings by international agencies have attracted foreign capital inflows. Last month Fitch Ratings upgraded Indonesia’s ratings from BB to BB+, one level below investment grade, citing the country’s resilience to the global financial crisis.

Yesterday’s sale of retail sukuk attracted 17,231 investors, more than the 14,295 investors purchasing the first retail sukuk.

Investors with an age from 41 to 55 years old -- comprising 40.79 percent of total investors -- bought the most retail sukuk, of 35.32 percent of the total volume of Rp 8.03 trillion.

The Finance Ministry also picked the best three selling agents: Bank Mandiri, Bank Negara Indonesia and Bahana Securities to sell the retail sukuk.

Indonesia, the world most-populous Muslim nation, is tapping individual investors after it was forced to scale back an overseas debt sale as it seeks to alleviate its budget deficit.

Sales of sukuk may increase 24 percent to $25 billion this year, led by Southeast Asia, CIMB Group Holdings Bhd., the leading broker of such issuances, said last week.

“Demand is strong because the government is paying a bit of an extra yield from what you can get in the secondary market,” said Suryandy Jahja, managing director at PT Kresna Graha Sekurindo in Jakarta.

“Sukuk are special products that appeal to a lot of retail investors in this country and there’s a lot of untapped cash in the system,” he was quoted as saying by Bloomberg.

Indonesia has projected a budget deficit of Rp 98 trillion this year, equivalent to about 1.6 percent of gross domestic product. The shortfall was Rp 87.2 trillion in 2009, according to the Finance Ministry.

Indonesia, Philippines Plan January Global Debt Sales

Businessweek

By Shelley Smith, January 04, 2010, 08:38 AM EST

Jan. 4 (Bloomberg) -- Indonesia, the Philippines and Vietnam are competing to be among the first Asian governments to sell foreign-currency bonds in 2010, as a global economic recovery supports investor appetite for emerging-market debt.

Indonesia plans to sell as much as $4 billion of U.S. dollar bonds with 10- and 30-year maturities, a person familiar with the matter said today. The Philippines is preparing to sell as much as $1.5 billion of debt denominated in dollars or euros, while Vietnam plans to raise as much as $1 billion in dollar bonds this month, according to people aware of the plans.

“There’s appetite for high-yielders,” said Michael Pisler, an emerging-market debt trader at SJS Markets Ltd. in Hong Kong. “The biggest determining factor will be fund inflows into the region as the economies improve.”

The difference in yield to own bonds in developing countries instead of Treasuries dropped 4.16 percentage points last year to 2.74 percentage points, according to an index compiled by JPMorgan Chase & Co. Global funds bought more than $8 billion of emerging-market debt in 2009, after pulling out $18 billion in 2008, according to data published by EPFR Global.

The government may sell global bonds through a placement “when the time is right,” Finance Minister Sri Mulyani Indrawati said in Jakarta today, without giving details. Indonesia hired Barclays Capital Plc, Citigroup Inc. and Credit Suisse Group AG for a sale, a ministry official said last month.

Time is Right

Indonesia, Southeast Asia’s biggest economy, last sold $3 billion of bonds in overseas markets in February, and raised $650 million from the sale of Islamic dollar bonds in April. The government plans to raise $11 billion from local and overseas bond sales in 2010 to finance a budget deficit forecast at 98 trillion rupiah ($10.4 billion), or 1.6 percent of gross domestic product

Indonesia’s budget deficit totaled 87.2 trillion rupiah last year, less than a forecast 129.8 trillion rupiah, the Finance Ministry said on Jan. 1. The economy probably grew 4.3 percent to 4.4 percent last year, the ministry said.

Moody’s Investors Service lifted Indonesia’s foreign- currency debt ratings one level to Ba2 on Sept. 16, citing the economy’s resilience. The Moody’s rating is two levels below investment grade.

Investors demand a 2.08 percentage points yield premium over U.S. Treasuries to buy Indonesian debt, according to the JPMorgan EMBI+ spread. The gap narrowed 70 basis points in 2009, compared with a 167 basis points widening in 2008. The cost to protect the bonds against default also fell in 2009, according to credit-default swap prices compiled by CMA DataVision.

Philippines, Vietnam

Yields on Indonesian 30-year debt and Philippine 25-year dollar debt rose today, ING Groep prices showed.

The Philippines has sold dollar-denominated bonds every January since 2005, according to data compiled by Bloomberg. It plans to raise $2 billion from the sale of overseas debt in 2010 to fund a budget deficit that Finance Secretary Gary Teves said may climb to a record 293 billion pesos ($6.4 billion) this year.

The Philippines is “opportunistic” in its borrowing and will sell overseas bonds when it’s the “right time,” central bank Governor Amando Tetangco told reporters today in Manila.

The central bank allowed the government “in principle” to sell up to $1.5 billion of global bonds, a person familiar said on Dec. 29. Separate approval was given to a plan to sell about $500 million in yen-denominated bonds, the person said.

“The government would want to put its finances in a solid footing by borrowing abroad early and at good levels,” said Roland Avante, treasurer at Manila-based Sterling Bank of Asia. “That, and the huge liquidity in the local market, would help ease pressure on domestic debt.”

Vietnam may sell notes with 10-year maturities, according to a person who declined to be identified before a public announcement. Vietnam hired Barclays Capital, Citigroup Inc. and Deutsche Bank AG to manage the sale, the person said.

--With assistance from David Yong in Singapore and Clarissa Batino in Manila. Editors: Sandy Hendry, Tom Kohn

To contact the reporter on this story: Shelley Smith in Hong Kong at +852-2977-6623 or ssmith118@bloomberg.net

To contact the editor responsible for this story: Tom Kohn at +852-2977-6610 or tkohn@bloomberg.net; Sandy Hendry at +852-2977-6608 or shendry@bloomberg.net.