Vestas is moving dangerously close to the edge

The crisis in Vestas is now so deep that the group existing only because of their banks want the too. According to a local Danish newspaper Jyllandsposten has Vestas has signed an agreement with banks to ensure that the company has enough money to continue operations. Otherwise they would have to close down operation.

The information has been disclosed in an interim financial statement for the second quarter of 2012.Which follows several years of poor financial performance and inability to change its strategy when the financial crisis hit in 2008.

The situation is now that Vestas has been unable to live up to the loan agreements made with its bank connections a significant step down from just a few years ago when the company was one of the fastest growing companies in Denmark.

Danger in the horizon

“Despite this, financial covenants testing is affected by the disappointing results realised by Vestas in the second half year of 2011 and the first quarter of 2012, which mainly related to the cost overruns in relation to the introduction of new technology” says the statement from Vestas to add: “Vestas has therefore agreed with its lenders to defer the half-year 2012 testing of the financial covenants contained in Vestas’ banking facilities and the lenders have allowed drawings, which in the opinion of Vestas are sufficient for the continued operation of Vestas on usual terms since the company expects to test on normal terms in the future.

According to Frank Jensen from the Danish Stock Analysis information that Jyllandsposten talked to is;

“The fact that banks are easing the requirements shows that the Vestas simply can not live up to them. There is only one explanation, and it is that they do not get the money in the Treasury, as required,” said Frank Jensen epn.dk.

This should be seen in the light that Vestas lost 338 million. euro in the first quarter and during the first two quarters the total is now nearing a total of 633 million euros.

Deficit of despite good figures for renevue

Revenue increased to 1.6 million. Euro. and is increase from 931 million. euros from the same quarter last year. However, the increased revenue is not impressive in the light that it bottom line showed a deficit of 8 million. euros after tax, compared with a profit of 55 million. euro in the second quarter of 2011.

Vestas considers this to be a temporary issue and in the light of the company’s positive results in the second quarter of 2012 combined with the large backlog of firm and unconditional orders, Vestas expects to meet the financial covenants contained in its current banking facilities in the near-term future.

With this in mind it becomes increasingly difficult to believe that Vestas will be able to live up to its financial commitment even after massive layoffs and changes on board level.

Too big to fail – at least half of the Danish banks should be liquidated by the state

A big story in Denmark or at least a big story to the ones that cares is that a big proportion of the Danish banking system has been receiving guarantees so that they will not fail. The state and there by the citizens of Denmark, have vowed that no matter what they do and what decision that take, that we in the end will come and rescue them from themselves.

But is this really in the best interest of the country? Or even a viable way to solve the crisis that we are in the mist of?

There are some 120 banks in Denmark at the moment, which is about one bank per 45,000 Danish citizens. In Germany there by comparison around 350 commercial banks, which calculate to around one bank per 231,000 citizens. While the number of banks per citizen is decreasing it is very far from any kind of sustainable structure.

At the same time a lot of banks are now trying to get into a very exclusive club of “too big to fail” institutions. The members are in reality guaranteed to be financially subsidized by the Danish state no matter how stupid or arrogant that they choose to be in the future. Many of these institutions only operate on a local or regional level and have a great deal of vulnerability especially towards the construction sector. It is estimated that just of these 20 banks will need around 20 billion Euros within the next few years just to be kept afloat. Even for a well-off country like Denmark this is a significant chunk of the GDP.

So the question is if we should take these vulnerary banks and liquidate them and thereby minimize the loss to society or should we wait and see what happens? These is of cause the dilemma that these are in essence private businesses but if they think of them selves as too big to fail should we not at least have some control over the process and governance within these companies. These is not doubt that selling the good assets now will bring in a significant bigger return compared to the price we can get when the bank is no longer sustainable and the subsequent loss on the bad assets is something we would have had to endure anyway.

Another benefit of liquidation of smaller regional and local banks has to do with governance. We have now seen numerous times that members of bank boards and executive management have been privately engaged with the people that they have been lending money. This close relationship have meat that common financial sense have been overridden by personal favouritism and to many second chances which in the end have meant that the banks commitment have been too deep and focused on a few companies in high risk areas. This have en essence meant that the risk exposure have been way to high and management have been willing to hide the exposure to other clients because of their personal commitment. And effort to liquidate will at least in theory bring a arms length approach back into the lending practices or at least enable institutions to spread their risk on a much wider field of different industries and individual companies just because of their size.

One final note is that the banks should not be owned or operated by the state but merely be sold off in pieces so that clients and “good” lenders continues to be provided with a banking service that they can rely on. A actually think that the state would properly be the worst place to have a operating government involved as it would easily be soon as a cheap place for getting funds for political projects. But on the other hand I think it is unwise to have so many banks in one country when it is so clear that it is not something which the country can even hope to be able to sustain.

Can we really take another hit – Global Financial crisis 2.0

The honourable Alan Greenspan testifies before...

Image via Wikipedia

What is the difference between the state of the world in 2008 and how we are doing here in 2011. Well if one look at the global assets they fell by 16 trillion USD in 2008 according to McKinsey lead by the US, Japan and China who almost lost 10 trillion USD just the between the three (that is 10,000,000,000,000 USD).

If you look at another key indicator for economic performance that both affect organisation and countries one could look at the total Equity compared to GDP. Out of 112 sampled countries in 2007-08 every single one lost value. With countries in the Eurozone as the worst places to be it is no wonder that everyone is looking here to find some kind of political will and comprehension of the enormity of the crisis that have hit their economies. All of the countries of Greece, Ireland, Austria, Russia, and Iceland lost more than 64% of their equity value in this period. One could argue that there was an unholy alliance between business and government policies in these countries, which contributed to their demise but the fact is that it happened and now we have to deal with the consequences.

In 2009-10 the markets did regain some of their momentum and there were signs that some of the structural issues which needed to be addressed did get at least some attention. But these things take time to work and even to this date no one really have a real overview of what went structural wrong in 2007-08. The economist are at the moment treating symptoms of the decease more than they are treating the sickness it self. Not because they did not want to prescribe a cure it is just so that the financial and economic instruments available to us do not have the affect that they used to. Neither Marx, Keynes, Hayek or any of their followers can prescribe a treatment that will cure the decease and put the world back on its tracks. While we might like whish that some really brainy economist comes up with an answers to the problems we face it is more likely that they will not.

So standing on the edge of economic collapse the last thing we need is another crisis but that is exactly what we are about to face.  And we are not ready at all to meet the challenge.

First of all the world do not have the financial strength that it had priori to crisis 1.0. Not least is the banking industry not ready to take another hit and it is more likely that we will see numerous bank and financial institutions disappear in the coming years. But worse is that people pensions will be affected on a scale we have not seen before. In several countries the government were able to help pensioners from loosing their life saving or at least they had some kind of package that meant they would be able to retire with some finds to live of. This option is no longer available because the governments do not have the money that they used to and if they want to help again they will have to borrow money at a much higher interest rate. Just look at the downgrade we have seen done by S&P and how they have create chock waves through the political systems in the US and Japan.

Second issue arise because the dynamics of the crisis have changed. Before we could put the blame on the financial institutions, on greed and even on numerous fraudsters who were exposed as there schemes no longer worked. Now the crisis exists as much in the realm of politics as it affects businesses ability to operate and evolve. In the first crisis it was easy to see what to do or at least what we believed we could do, things like bank reform, ethics guidelines, systems of control etc. but now the picture is much more blurred. We have had several rescue packages since 2008 that have been designed to help one industry or another, but while the money used in the first instance were relative easy to get hold of it is more likely that future funding will come as hard money. The funding can be either borrowed at high interest rates or be fund by cutting national budgets and or in combination with increased tax. This will certainly create political instability and governments will come under intense pressure as we have seen in places like Spain, Greece, Italy and lately Israel. The question is if governments will try the short-term “easy” way out and print money instead of dealing with the issues that almost certainly will cost them their political power.

The fact remains that the state of the world is not the same as in 2008 and that neither markets nor politicians are ready for another global financial crisis.