Fighting for liquidity

The FT today has an article describing a manover designed to increase asset liquidity in the troubled diamond industry, which is alarmingly reminding of the issues faced by Antwerp merchants in the 15th and 16th century.

Se vogliamo che tutto remanga,

"Se vogliamo che tutto rimanga com'è, bisognà che tutto cambi!" (Tancredi di Falconeri)

Belgium’s €1bn diamond bail-out

By Stanley Pignal in Brussels

The diamond industry is set to be the latest to be bailed out by the Belgian authorities as a group of banks agreed to fund a €1bn credit facility for gem dealers.

The banks have agreed to take diamonds as collateral if the government alters lending rules to allow them to take the gems on to their books.

The money, part of a package to encourage banks to resume lending to the sector, is needed “to restore confidence in the diamond trade”, said Freddy Hanard, head of the Antwerp gem association.

The Belgian capital’s gem industry has asked the Flemish regional government for a €200m ($275m, £176m) temporary guarantee to underwrite the scheme. The city’s 1,800 diamond dealers are struggling amid a 30 per cent slump in sales volumes and a decline in prices, in spite of moves from mining groups to limit production.

Many dealers are facing liquidity problems because they are unwilling to sell at a loss gems bought at the height of the market in 2008. They have seen their credit lines withdrawn after banks questioned the value of the unpaid invoices they usually use as security against loans. Using gems as collateral would give Antwerp’s dealers an entirely new source of credit.

Belgian banking authorities have been loath to expose banks’ balance sheets to volatile diamond prices – not to mention the risk of the “secured” diamonds disappearing with an absconding jeweller. Victor van der Kwast, head of diamond and jewellery financing at ABN Amro, the biggest lender to the sector, said the bail-out was necessary to create a “level playing field” with emerging diamond centres such as Mumbai or Dubai.

“Only in Belgium are we not allowed to borrow against stock. Inventories are quite high at the moment and this is dead capital right now,” he said.

He stressed the need for a reliable, independent valuation of the diamonds the banks would lend against, as well as the suggested €200m state guarantee “to provide banks with a level of comfort”.

Other banks involved in the agreement include the Antwerp Diamond Bank as well as State Bank of India, Bank of India and ICICI Bank, which is also from India. The state facility would act as a cushion to limit banks’ exposure to diamond prices, but is likely to require the acquiescence of the European Union.

Although gem prices are volatile, latest available figures suggest dealers are holding about €5bn worth of stock, which could be used as security.

Kris Peeters, minister-president for Flanders, visited significant players in the diamond sector this week to hear their concerns and said his team would examine the request. A spokesperson declined to say when a decision would be made. Elections in Flanders are due to take place on June 7. The diamond trade is one of the mainstays of Antwerp, which claims to handle 80 per cent of all rough diamonds sold globally, and about half of all cut stones.

2 Responses to Fighting for liquidity

  1. Rich says:

    Ben: this is a very timely post. The luxury diamond market has been shrinking due obviously to the recession. Recently in the FT, there was an article about the De Beers organization and their efforts to sell investment diamonds to high net worth
    individuals, and commodity funds. I know a few people who are very familiar with that group, and we were talking about this one night. My problem with diamonds as an investment is the pricing mechanism. Unlike the London Bullion Market where the price of gold is based on supply and demand, the world price of diamonds is basically set by De Beers, and over the years, they have kept those prices artificially high, hence the problems in Antwerp.

  2. Ben says:

    I really like commodity market, I find them some sort of tangible quality (which completely disappear with future markets). This may be related to our psychological bias leading us to value what we have now more than what we can get later.

    Another great subject related to that is the rising weight of India and Dubai on the gem, gold and pearl market.

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