Category Archives: banking

Digital currencies and more

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Bitcoins are a bad idea.  I’ve put this forward from multiple directions already.

What’s interesting is the range of new, government-sponsored digital currencies that are in development. Digital currencies might also be a little bit of a stretch, they’re still more like digital payment methods. Unlike Bitcoins, there is much to recommend about low-cost, high-security, electronic digital payment platforms.

Japan is toying with slightly different ideas. Rather than using a traditional ATM card to withdraw cash, you might simply use your palm. It really is only a matter of time before the ubiquitous plastic card disappears into a cellphone, embedded chip, retina scan or something.

Sweden is moving towards a cashless economy, with one of the driving factors being security – as in personal safety. Maybe I’ve missed some news stories (or not read Dragon Tattoo enough times) but I wouldn’t have thought that Sweden would be first in the world at worrying about personal safety.

To be clear, there are several wide-scale advances in this area around the world already.  These aren’t specifically digital currencies, but rather different, more efficient methods of payment.  The UK Oyster card is a good example of a wide-scale contactless payment system that works well for small payments in a fast-speed transaction environment. The precursor of the UK’s Oyster is Hong Kong’s Octopus card, which is actually used or micro-payments on transport systems, many parking areas and even vending machines.

Google and PayPal have systems allowing small digital payments that are cost-effective, but still linked to an account so your account information is linked directly to the transaction. One of the apparent virtues of Bitcoins is their anonymous nature. Now for the most part most individuals aren’t particularly bothered by anonymity, but it is a genuine concern. Do you really want a vending machine company to know when and where you buy your Coke and Vitamin Water from their vending machines? Would you want this information to be aggregated with your online purchases and fuel purchases and airline ticket purchases? Very soon the information that Google currently stores on you would be a drop in the information ocean from these real world movements and transactions.

So Canada’s proposal for an anonymous, digital currency is really interesting. Government backing is one good way of giving credibility and scale to a system that many competing system will not be able to manage.

For me, one of the most interesting aspects of the story was the Canadian Mint’s IPO of an exchange traded listing for gold receipts for gold stored at the mint. This is basically the oldest form of gold-backed currency – receipts of gold on deposit at an institution where the receipts were tradeable and allowed “gold” to be used for transactions more conveniently and safely that gold bars and coins.

What once was old is now new.

SAM and Basel III deadlines

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Seems like the SARB is requiring South African banks to adopt Basel III (or the tweaks to Basel II that people are calling Basel III) in line with international developments.

Meanwhile, it seems the FSB is still committed to a 2014 deadline for SAM. Given the range and size of stumbling blocks still to be traversed, I expect if we do go live in 2014 it will be with some transitional measures.

Nearer the edge than ever before

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Great piece outlining the very real, very possible and very very awful possibilities and implications of Italian default.

I wouldn’t want anything to do with any bank that has much at all to do with European banks or European sovereign debt. The old South African Rand is seeming like a safer relative bet than at pretty much any other time in the last decade.

Greek default?

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So European politicians have more or less agreed a deal which may, more or less, push some of their problems to one side for a period. Yes, I’m not madly optimistic about this as a cure-all.  This is not the end of the Euro problems.

Part of the deal is a “50% loss for private investors”. Which is part true and part nonsense but will be an effective Greek default when enacted / agreed. (I don’t care how “voluntary” it may be, it’s a default and almost all definitions of default include restructuring of debt in any way that isn’t what was originally promised.)

Why is it only partly true? Well it’s not necessarily a “loss” for private investors. The probability of default on Greek bonds has been just about 100% for a while now. This probability of default is derived from market prices for Greek bonds and market spreads on Greek Credit Default Swaps (CDS) and an assumed Loss Given Default or Recovery Rate for investors when the bonds do default. Actual Recovery Rates vary widely, but often analysts plug in the average Recovery Rate over most of this century on unsecured debt which is around 40%.

So if market prices for Greek bonds assumed 100% default probability and a 40% recovery, then a 50% recovery doesn’t sound so bad. The potential downside is that Greece may still (need to) default on these written-down bonds at some point in the next two decades.

So the real question is what will the new probability of default be? Then we will know whether investors “took a loss” and perhaps gain the market’s view on how successful the deal really will be.

Swazi King not sure he wants the conditions attached to the loan

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This is really fantastic news.  The Swazi King is apparently reluctant to accept the loan from South Africa because of the conditions imposed in the agreement. I was quite harsh in criticising the granting of the loan with only conditions for improvement far down the line.  (I still believe the first condition should be an immediate unbanning of political parties.)

Hearing that the conditions are sufficiently onerous that the borrower may not want it is great news. At the very least this reflects a balanced package rather than one heavily in favour of the undemocratic absolute monarchy of our neighbour.

I wonder how many of these conditions were added or modified after the initial public announcement. Cosatu, amongst other powerful groups, has also been very outspoken against the loan.