Friday, 25 April 2014

"Adverse interest rate movements"???

From the BBC:

London's Gherkin skyscraper has been placed into receivership by its creditors after one of its owners was placed in insolvency.

Germany's IVG Immobilien, which co-owns the 40-storey Gherkin with private equity firm Evans Randall, filed for insolvency last year...

"Adverse interest rate and currency movements" added to the building's debt burden, said Deloitte, which led to defaults on the debts dating back to 2009.

The skyscraper, designed by Foster and Partners, was built by reinsurer Swiss Re in 2004 and was sold to IVG and Evans Randall in 2007 for £600m.

Very strange.

Haven't interest rates been drifting steadily downwards for the last forty years or so?


Ralph Musgrave said...

The relationship between central bank base rates and rates actually charged in the market are a bit tenuous. In fact according to these two studies, there is almost no relationship:

As for the rates charged for credit cards, there is no relationship between those and base rates at all. See:

The idea that interest rate adjustments are a good way of regulating economies is an emperor with no clothes, far as I’m concerned. Unfortunately it’s a well established emperor, and it’s no use naughty little boys like me pointing out that the emperor has no clothes.

Mark Wadsworth said...

RM, agreed.

Clearly, credit cards, unauthorised overdrafts, pay day loans have got nothing to do with BoE base rates, never did

Historically, the BoE base rate used to track 3-month LIBOR and set a certain sort of minimum which banks would charge for lowest risk loans (why would they lend for less?).

But the current BoE rate, plus the funding for lending and HTB nonsense are way below market rates, it's the government's way of ensuring healthy bonuses for their friends the bankers.

So reducing the base rate to significantly below market rates clearly has no effect on the real economy, as you say. other refer to this as "pushing a piece of string". It's gravy for the banks, is all.

Lola said...

Oh ho! Didn't I read somewhere that there is an index between the height of skyscrapers as a warning of impending economic failure? Is this the first straw in the wind.

(It might just be a ploy. I would make a bet that in the background there is a pre-pack waiting. This might just be the nuclear option in re-scheduling the debt).

Anonymous said...

"Adverse interest rate and currency movements"

Could just mean they got their hedging arse about face.

Dinero said...

maybe they had a Put on Bond prices, or the Gherkin felt intimidated by the completion of the Shard, one or the other.


Banks only pay for borrowing reserves if they don't have enough themselves for clearing and even then they are only needed for the balance after clearing transactions are netted off, and so they could lend for less than the BoE reserves rate. When its not at record lows of course.

Graeme said...

My take is that it is a commentary on modern building standards. The Gherkin must be about 10 years old and therefore it is falling apart...the glass panels are starting to dislodge from their anchorages and are about to crash onto the pavements.

john b said...

The Bloomberg piece makes this clearer:

The issue isn't interest rates but exchange rates: IVG borrowed the money to buy the building in Swiss francs, which have gone up over 60% against the UK pound. So they now owe about 1.5 billion CHF for a building which is worth about 900 million, which is some serious negative equity.

The GBP value of the building itself is still holding up; it's not any kind of sign of an end to the London property boom or that the Gherkin is no good.

It is worth remembering, more generally, that from the perspective of international investors, UK property prices have fallen significantly since the start of the recession, despite the fact that they've not fallen in GBP terms.

DBC Reed said...

They would n't have placed a Put on bond prices surely? The Gov is screwing the economy trying to keep interest rates low... to keep all their Homeownerist client voters happy in their small, over-priced houses.

Mark Wadsworth said...

L, yes you did, it's a widely observed phenomenon.

P, yes.

Din, the BoE has basically two rates. On is pays on money which banks deposit with it, currently 0.5% which is so low as to have no effect on the real economy.

The other rate is the one which they charge banks which borrow from it (Funding for Lending etc). This is also very low and does have some impact in boosting bank profits, reducing interest paid to depositors and pumping up land and share prices, hence damaging the economy.

G, no, Gherkin value went down a bit and then back up to where it was, as John B says.

JB, yes, having read a few articles, it appears that the idiots borrowed in CHF, which was asking for trouble. So it's FX movements and not interest changes which ruined them.

DBC, see JB's explanation.