Monday's Top 10 with NZ Mint: Owen Glenn slams Key's lack of a blueprint; AMI's stress hits front page; America's silent bank run; Portugal's desperation; Dilberts

Here's my Top 10 links from around the Internet at 10 to 10 am (!) in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

Huzzah! Now I need to do it for five days in a row....hmmm....

1. Now the mainstream media are catching on - Rob Stock and Rob O'Neill wrote a front page story in the Sunday Star Times examining the financial issues facing AMI Insurance as it struggles to deal with massive claims with a limited pool of capital and reinsurance.

Amanda Morrall here at Interest.co.nz first reported on AMI Insurance's financial issues on March 11. See her article here.

And here's our March 24 article on AM Best downgrading AMI Insurance here. See our article here.

The two Robs do a great job of pointing out how AMI Insurance bought less reinsurance cover than the rest over the years.

Many of AMI's competitors have often grumbled about its low prices. Now this may be coming home to roost.

There's also some questions to be raised about whether the Reserve Bank has forced insurers to take out enough reinsurance cover.

Here's the SST:  

Sunday Star-Times calculations show AMI invested 3.7% of premium income in reinsurance. Other insurers exceeded 10%, with Lumley General reporting 16.3%.

AMI chief executive John Balmforth said a large part of the insurer's business was cars, but it also had exposure to residential insurance.

"We had more than adequate reinsurance for the first earthquake, but the limit of $600m for the second quake is likely to be tested," he said.

"Our reinsurance was set against a 1000-year event. An aftershock of the scale of the February 22 event is virtually unprecedented in terms of the damage caused."

Despite the difficulties in estimating the costs, Balmforth believed AMI could meet its earthquake obligations.

AMI's reinsurance levels exceeded the Reserve Bank's draft solvency guidelines and modelling undertaken internally and with reinsurance providers, he said.  

2. Will China build Christchurch's houses? - Charlie Gates at The Press reports on fears that 10,000 temporary homes being built to house Christchurch refugees may be built in China.  

A Canterbury contractor said he was told by a Department of Building and Housing official the units would be made in China. The Government had been expected to announce the successful bidder today, but the announcement has been delayed for up to a week.

Hagley Park is also believed to be among the possible housing sites, but only as a last resort if demand is high. More than 200 companies had bid for the contract, but the seven favoured bids were understood to be from New Zealand. 

3. Problems for Fonterra's plan? - Andrea Fox at Stuff points out that Fonterra's share trading plan may not get through parliament before the election, which would throw a big spanner in the works for the units/things to start trading by 2013.

With some in the investment community uncomfortable about aspects of the proposal, an election-year Commerce Commission investigation underway into the retail price of milk, growing public policy concerns, and the parliamentary clock ticking on a tight legislative timetable this year, the latest capital restructure plan from New Zealand's biggest company could be losing traction.

Chairman Sir Henry van der Heyden's statement last week that he saw "no roadblocks ahead" for the complex proposal, which needs legislation change, is wishful thinking, say commentators.

Fonterra group strategy and corporate finance general manager Alex Duncan, one of the plan's architects, acknowledges a discussion paper by Agriculture Ministry policy officials has caused "excitement". But he expects a package of details to be released by Fonterra imminently will clear the "speculation".

4. Europe's bubbling sovereign debt crisis - Europe's politics is worth watching because it is the crucible where Europe's financial future is hammered out. Now Reuters reports Spain's Socialist Prime Minister Jose Luis Rodriguez Zapatero has announced he won't seek re-election next year.

Spain is the big kahuna in Europe's debt markets and is worth watching for that reason along.

"There needs to be no doubts over how the economy will be managed in the coming months," said Emilio Ontiveros, chairman of International Financial Analysts.

5. Portugese desperation - Portugal was so worried last week about not seeking a bailout it borrowed US$2.3 billion through 14 month notes at an even more expensive yield than what it would pay in a bailout, Bloomberg reported.

Portugal’s decision to sell the securities is “not easy to understand” because the nation could get similar rates for longer-term loans through an international bailout, said ING Groep NV rate strategist Alessandro Giansanti in an e-mailed note today said.

It’s difficult to see why Portugal would pay the market yield of 6 percent for a “one-year loan, when you can have for the same rate on a 7.5-year loan from the European Union and International Monetary Fund,” he said.

Portuguese bond yields have climbed to record levels after Prime Minister Jose Socrates resigned on March 23 following a parliamentary rejection of a deficit-cutting plan that aimed to prevent Portugal from following Greece and Ireland in seeking a European Union rescue

6. The Chinese are nervous - The Washington Post reports high profile Chinese dissident and architect Ai WeiWei (one of my heroes) was arrested over the weekend in Beijing before he was about to fly to Hong Kong. It's not a good sign and shows the stresses are growing in China.

Ai is the highest profile activist detained so far in a comprehensive government crackdown that has swept up dozens of bloggers, human rights lawyers and writers.

The arrests seem related to official concern about the popular uprisings roiling autocratic governments in the Middle East, and fears that activists in China want to launch a similar “jasmine revolution” here.

Some of those detained have been accused of “inciting subversion of state power,” a catch-all term used to jail anyone critical of Communist Party rule. That was the same charge used to convict Liu Xiaobo, the 2010 Nobel Peace Prize winner, who received an 11-year prison sentence.

7. What happens when the Fed stops printing? - The June deadline for the end of the US Federal Reserve's money printing is approaching and some are wondering what happens next.

Bloomberg reports the Federal Reserve's New York Governor, William 'let them eat iPads' Dudley, as saying there was no need to either curtail the US$600 billion programme of bond buying (money printing) or to extend it.

Guess what will happen to US Treasury bond yields (the base for rates globally) when the Fed stops buying? They'll rise and possibly quite sharply.

“I don’t see any reason to pull back from that yet,” Dudley said to reporters after a speech yesterday in San Juan, Puerto Rico. Market expectations are for the Fed to complete its planned bond purchases in June and not to announce additional buying, he said. “I don’t view those expectations as unreasonable in any significant way.”

U.S. Treasuries reversed losses after Dudley’s remarks countered investor speculation the Fed is poised to withdraw stimulus. His comments countered suggestions by other policy makers, including Federal Reserve Bank of Philadelphia President Charles Plosser, that the central bank should consider raising interest rates this year.

8. What happens when there's no iPads? - Dudley is now famous as the guy who told a bunch of grumpy New Yorkers that they should worry less about food price inflation because iPads were cheap. Now the Japanese earthquake is forcing people to wonder what happens to inflation when there is a supply shock, like the earthquake.

Here's Willam Pesek at Bloomberg:

Supply-chain disruptions are part of a bigger and underappreciated phenomenon: the extent to which Japan’s plight may worsen global inflation.

Along with forcing executives to scramble for production options outside Japan -- an effort that puts the pricing power in the hands of factory operators -- this crisis places additional pressure on raw material and food prices. That’s horrible news for Asia, where central bankers have been scrambling to head off consumer-price gains.

South Korean inflation climbed to the highest level in 29 months in March, adding pressure for another interest-rate increase. Korea is one of eight Asian economies that tightened monetary conditions last month. India, the Philippines, Taiwan, Thailand and Vietnam raised rates, while China and Malaysia told lenders to set aside more cash as reserves.

9. The bank run we weren't told about - The US Federal Reserve's data dump of the last week has laid bare how precarious the global financial system was as early as mid 2007 and how US officials were ... er.... economical with the truth about it at the time.

Here's Gretchen Morgenson at the NYTimes:

The Fed documents, like much of the information about the crisis that has been pried out of reluctant government agencies, reveal what was going on behind the scenes as the financial storm gathered. For instance, they show how dire the banking crisis was becoming during the summer of 2007. Washington policy makers, meanwhile, were saying that the subprime crisis would subside with little impact on the broad economy and that world markets were highly liquid. For example, on July 23, 2007, Henry M. Paulson Jr., the Treasury secretary at the time, said the housing slump appeared to be “at or near the bottom.”

Two days later, Timothy F. Geithner, then the president of the New York Fed, declared in a speech before the Forum on Global Leadership in Washington: “Financial markets outside the United States are now deeper and more liquid than they used to be, making it easier for companies to raise capital domestically at reasonable cost.”

Within about a month’s time, however, foreign banks began thronging to the Fed’s discount window — its mechanism for short-term lending to banks. Over four days in late August and early September, foreign institutions, through their New York branches, received a total of almost $1.7 billion in Fed loans.

10. Show us the strategy Prime Minister - Owen Glenn spoke on Andrew Patterson's Radio Live programme on Sunday. He was typically forthright and criticised the Prime Minister's lack of strategy. Here's the interview and the comments about Key are from 19 minutes on.

"We're now seriously in trouble. Borrowing NZ$300 mln a week is seriously in trouble. You'll end up just servicing the debt. Next they'll go after your assets," he said.

"John Key has to follow through on his tough attitude." he said.

"Prime Minister. Where is your blue print for the next five years. You're tinkering with things. What this country needs is a firm hand. Let's take our medicine and get on with it. Let's earn our keep. We can do it. It's a wonderful country."

11. Totally Jon Stewart video on the Libyan situation (America! At Not War) CIA operatives are covertly arming Libyan rebels. I'm not sure many New Zealanders know how unpopular this thing is in America. "When we arm them we need to include the instructions to the weapons..."