A Story within the Story
Following the collapse of the biggest credit bubble in history, there has
been no shortage of finger pointing and the hedge fund industry, which has
always had an uncanny ability to be at the wrong place at the wrong time,
has yet again been at the centre of attention. And politicians, keen to divert
attention away from themselves as the true culprits of the crisis through
years of regulatory neglect, have been quick at picking up the baton.
Admittedly, the hedge fund industry is guilty of many stupid things over
the years, but blaming it for the credit crisis is beyond pathetic and the
suggestion that increased regulation of the hedge fund industry is going to
prevent future crises is outrageously naïve.
If you prohibit private investors from investing in hedge funds which on
average use 1.5-2 times leverage but permit the same investors to invest in
banks which use 25 times leverage and which are for all intents and
purposes bankrupt, then you either don’t understand the world of finance
or you don’t want to understand. Shame on those who fall for cheap tactics
Showing posts with label Banks. Show all posts
Showing posts with label Banks. Show all posts
Wednesday, July 1, 2009
Sunday, April 26, 2009
Global Bank Writedowns: Canadian Troublemakers
From Infectious Greed at http://paul.kedrosky.com
The darn Canadians won't get with the program with respect to global bank writedowns!
Answer....maybe its just because they do not have too!
Sunday, April 5, 2009
Sunday, March 22, 2009
Economic Policy Conundrum
The world's economy is facing years of ill-begotten economic policies. The worst economic downturn in 80 years is the result of these policies. Healthy economic growth is savings based and thus is sustainable. However, the economic growth that has occurred was not based on savings and production, but was credit and policy induced. It was and is artificial and thus unsustainable.
The policies that were implemented included:
The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.
Economic demand has to be savings driven to be sustainable.
What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.
What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.
I think the people want change, and are willing to go with lower growth based on real economic principles and values.
However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.
The policies that were implemented included:
- Monetary policies - these kept interest rates low (artificially) for years
- Tax policies - favour debt financing over equity
- Regulatory policy - that allowed financial institutions to mismanage their operations eg excessive leverage
- Social policy - which pushed home ownership regardless of affordability
The current world's view is that the solution lies in re-inflating the assets values. The proposal is to create more debt and more demand to lift the asset values. But this was the cause of the problem! Debt-financed demand can't not be sustained indefinitely and that is why the policy is doomed to fail in the long-term.
Economic demand has to be savings driven to be sustainable.
What now the governments has recently announced that in addition to debt driven demand, that they are now will use the nuclear option....of printing money which is a debasement of the currency. That will push up asset values in nominal terms but not real; as well as pushing up costs. Inflationary environments....everyone losses.
What is needed? It is an economic Marshall Plan for the world markets and economies. It requires work, it requires sacrifice, it requires lower expectations.
I think the people want change, and are willing to go with lower growth based on real economic principles and values.
However, what is required is need real leadership, leadership on savings and reducing costs. The US Congress needs to be an example and they are failing the world. Instead they are delivering empty promises, rhetoric and phony legislation. Appalling and disappointing.
Monday, March 16, 2009
Sunday, March 15, 2009
Friday, March 13, 2009
Tuesday, March 10, 2009
Renewed fears rattle through credit markets
BOYD ERMAN
Tuesday, March 10, 2009
CAPITAL MARKETS REPORTER
Credit markets are lapsing into a renewed slump, stymieing central bankers who have gone to unprecedented lengths to get money flowing into the economy.
After taking some baby steps toward normalcy in the first months of 2009, the market for risky corporate debt such as junk bonds is again seizing up, pushing interest rates higher for those companies lucky enough to find financing and threatening to leave many borrowers shut out. The premium that investors are demanding to buy junk bonds has jumped to 19 percentage points above government bonds from 16 points just three weeks ago.
Investors also fear more financial institutions may fail, sending measures of the risk of bank bonds to record highs. At the same time, the rising cost of interbank lending signals bankers are again growing leery of one another. Banks are now charging 1.31 per cent interest to lend each other U.S. dollars for three months, up from a recent low of 1.09 per cent in mid-January.
About the only debt that investors will buy is the two-year U.S. Treasury, traditionally seen as the safest of all havens.
The flow of money out of risky assets into only the safest exacerbates the economic malaise by making it tough for companies to raise money to expand or even to just stay alive, forcing them to cut jobs and spending to cope.
For Canadian companies that need to refinance debt soon, such as miner Teck Cominco Ltd., the renewed troubles in the credit market are bad news.
"Against a background of worsening fundamentals, a poor fourth-quarter earnings season - thankfully drawing to a close - and the spreading of the crisis's tentacles far, wide and deep, more areas of the credit market are starting to feel the strain," said Suki Mann, a credit strategist at Société Générale in London.
The rapidly worsening recession is one reason for the latest slump in credit markets, with the World Bank yesterday saying that the global economy will shrink in 2009 for the first time since the Second World War.
But analysts say the underlying problem is that while central banks such as the U.S. Federal Reserve are pushing hard to get the economy going again with rate cuts and by printing money, the U.S. government is sabotaging those efforts by failing to lay out a clear and credible plan to deal with problem banks.
"This is really uncharted territory," said Michael Devereux, a University of British Columbia economics professor and a Bank of Canada research fellow. "Most economists would have expected that with this level of expansionary monetary policy and expansionary fiscal policy, we would have started to see some things happen."
The issue for many investors, he said, is "the critical steps to fix the banks have not been taken, and because of that there's just no possibility of a resurgence of financial confidence."
Impatient credit investors panned the announcement yesterday by the Obama administration that Treasury Secretary Tim Geithner will unveil his plans for fixing the banking system in "coming weeks."
"Perhaps the market is pushing, in a free-market manner, the government to make the decisions sooner rather than later," said Tim Backshall, chief strategist at Credit Derivatives Research, a California firm that tracks debt markets.
In the meantime, hard-won gains in confidence from late 2008 and early 2009 are bleeding away.
The Credit Derivatives Research Counterparty Risk Index, a measure of investor fears that banks will fail, rose to a record high yesterday, led by concern that Citigroup Inc. might not make it after posting $28.5-billion (U.S.) of losses since the credit crunch began.
And despite perceptions that Canada's banking system is safer than any, the cost of insuring against a default on five-year debt issued by the country's largest bank, Royal Bank of Canada, also rose to a record yesterday, according to Markit Group Ltd.
That means banks will have to pay more to raise funds, leading to higher rates for borrowers, and many companies that depend on debt will have trouble rolling over loans.
The result is that no matter how much central bankers slash their targets for rates, the economy will struggle until credit markets are fixed because companies will cut jobs, close factories and put off expanding to hang onto what little cash they have.
Tuesday, March 10, 2009
CAPITAL MARKETS REPORTER
Credit markets are lapsing into a renewed slump, stymieing central bankers who have gone to unprecedented lengths to get money flowing into the economy.
After taking some baby steps toward normalcy in the first months of 2009, the market for risky corporate debt such as junk bonds is again seizing up, pushing interest rates higher for those companies lucky enough to find financing and threatening to leave many borrowers shut out. The premium that investors are demanding to buy junk bonds has jumped to 19 percentage points above government bonds from 16 points just three weeks ago.
Investors also fear more financial institutions may fail, sending measures of the risk of bank bonds to record highs. At the same time, the rising cost of interbank lending signals bankers are again growing leery of one another. Banks are now charging 1.31 per cent interest to lend each other U.S. dollars for three months, up from a recent low of 1.09 per cent in mid-January.
About the only debt that investors will buy is the two-year U.S. Treasury, traditionally seen as the safest of all havens.
The flow of money out of risky assets into only the safest exacerbates the economic malaise by making it tough for companies to raise money to expand or even to just stay alive, forcing them to cut jobs and spending to cope.
For Canadian companies that need to refinance debt soon, such as miner Teck Cominco Ltd., the renewed troubles in the credit market are bad news.
"Against a background of worsening fundamentals, a poor fourth-quarter earnings season - thankfully drawing to a close - and the spreading of the crisis's tentacles far, wide and deep, more areas of the credit market are starting to feel the strain," said Suki Mann, a credit strategist at Société Générale in London.
The rapidly worsening recession is one reason for the latest slump in credit markets, with the World Bank yesterday saying that the global economy will shrink in 2009 for the first time since the Second World War.
But analysts say the underlying problem is that while central banks such as the U.S. Federal Reserve are pushing hard to get the economy going again with rate cuts and by printing money, the U.S. government is sabotaging those efforts by failing to lay out a clear and credible plan to deal with problem banks.
"This is really uncharted territory," said Michael Devereux, a University of British Columbia economics professor and a Bank of Canada research fellow. "Most economists would have expected that with this level of expansionary monetary policy and expansionary fiscal policy, we would have started to see some things happen."
The issue for many investors, he said, is "the critical steps to fix the banks have not been taken, and because of that there's just no possibility of a resurgence of financial confidence."
Impatient credit investors panned the announcement yesterday by the Obama administration that Treasury Secretary Tim Geithner will unveil his plans for fixing the banking system in "coming weeks."
"Perhaps the market is pushing, in a free-market manner, the government to make the decisions sooner rather than later," said Tim Backshall, chief strategist at Credit Derivatives Research, a California firm that tracks debt markets.
In the meantime, hard-won gains in confidence from late 2008 and early 2009 are bleeding away.
The Credit Derivatives Research Counterparty Risk Index, a measure of investor fears that banks will fail, rose to a record high yesterday, led by concern that Citigroup Inc. might not make it after posting $28.5-billion (U.S.) of losses since the credit crunch began.
And despite perceptions that Canada's banking system is safer than any, the cost of insuring against a default on five-year debt issued by the country's largest bank, Royal Bank of Canada, also rose to a record yesterday, according to Markit Group Ltd.
That means banks will have to pay more to raise funds, leading to higher rates for borrowers, and many companies that depend on debt will have trouble rolling over loans.
The result is that no matter how much central bankers slash their targets for rates, the economy will struggle until credit markets are fixed because companies will cut jobs, close factories and put off expanding to hang onto what little cash they have.
Monday, March 9, 2009
Buffett says economy fell off a cliff
Warren is stating the obvious! The economy is hurting. The is the debt bubble unwinding.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
High risks in future is the restart of inflation.
LR
**************
Jonathan Stempel
Monday, March 09, 2009
NEW YORK — Warren Buffett said Monday that the U.S. economy had “fallen off a cliff” and eventually would recover, although a rebound could rekindle inflation worse than experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire also said the economy was mere hours away from collapse in September, when credit markets seized up, Lehman Brothers Holdings Inc. went bankrupt and insurer American International Group Inc. got its first bailout. “The world almost did come to a stop,” he said.
Mr. Buffett also called on banks to “get back to banking” and said an overwhelmingly number would “earn their way out” of the recession, even if stockholders don't go along for the ride.
“A bank that's going to go broke should be allowed to go broke,” but customers should not worry about their insured deposits, he said. Mr. Buffett said there was a “paralysis of confidence” in banks, which he called “silly” because of safeguards such as deposit insurance.
Mr. Buffett spoke nine days after telling shareholders of his Omaha, Nebraska-based insurance and investment company Berkshire Hathaway Inc. that the economy was in a “shambles” likely to persist beyond 2009.
On Monday, Mr. Buffett said the economy was experiencing “close to the worst-case” scenario, with business activity declining and unemployment rising, and that the economy “can't turn around on a dime.”
He said Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise, or at least not plummet.
“It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either,” Mr. Buffett said.
Maintaining his long-term optimism, Mr. Buffett said that “five years from now, I can guarantee you that the machine will be running fine,” although he hoped it would not take that long.
“We do have the greatest economic machine that man has ever created,” he said.
But he said an economic rebound could trigger higher inflation once demand rebounds. “In economics there is no free lunch,” he said. “We are going to attempt to have a lunch that to some extent we're going to pay for later.”
Mr. Buffett also urged Democrats and Republicans in Washington to work better together, and to communicate bipartisan efforts to fix the economy to voters. “You can't expect people to unite behind you if you're trying to jam a whole bunch of things down their throat,” he said.
Mr. Buffett also said the ailing Citigroup Inc., which Berkshire does not own, would probably keep shrinking, but that depositors should not be worried.
Saturday, March 7, 2009
Euro Area Risks Breakup
By Bo Nielsen
Feb. 27 (Bloomberg) -- Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
“People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
Debt-Default Insurance
Irish banks and foreign banks operating in Ireland together took on debt equivalent to 11 times the nation’s gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.
As concern intensified that the loans won’t be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision. Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.
The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street’s rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.
Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe’s benchmark government securities, to the widest since the euro’s debut.
Steinbrueck, Soros
German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would “show our ability to act” should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn’t expect a breakup of the region.
The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.
European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU “as a whole” to aid states in “economic difficulty.” ECB President Jean-Claude Trichet said a day earlier “there is no weak link of the euro area.”
“The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn’t that bad,” said Howard. “But the more dire it gets, the less are the consequences of departing from the euro.”
Shrinking Economies
German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.
European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.
“Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London. “Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere.”
German Elections
The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.
“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” former Bundesbank President Karl Otto Poehl said in London yesterday. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase,”
Feb. 27 (Bloomberg) -- Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
“People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.
Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”
Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.
Debt-Default Insurance
Irish banks and foreign banks operating in Ireland together took on debt equivalent to 11 times the nation’s gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.
As concern intensified that the loans won’t be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision. Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.
The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street’s rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.
Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe’s benchmark government securities, to the widest since the euro’s debut.
Steinbrueck, Soros
German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would “show our ability to act” should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn’t expect a breakup of the region.
The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.
European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU “as a whole” to aid states in “economic difficulty.” ECB President Jean-Claude Trichet said a day earlier “there is no weak link of the euro area.”
“The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn’t that bad,” said Howard. “But the more dire it gets, the less are the consequences of departing from the euro.”
Shrinking Economies
German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.
European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.
“Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London. “Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere.”
German Elections
The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.
“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” former Bundesbank President Karl Otto Poehl said in London yesterday. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase,”
Thursday, February 26, 2009
The Risk in Europe
Europe and the Euro are in trouble
*************************
By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
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By John Mauldin - Feb 20, 2009
I mentioned last week that European banks are at significant risk. I want to follow up on that point, as it is very important. Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
Western European banks have been very aggressive in lending to emerging market countries worldwide. Almost 75% of an estimated $4.9 trillion of loans outstanding are to countries that are in deep recessions. Plus, according to the IMF, they are 50% more leveraged than US banks.
Today the euro rallied back to $1.26 based upon statements from German authorities that were interpreted as a potential willingness to help out non-German (in particular, Austrian) banks.
However, this more sobering note from Strategic Energy was sent to me by a reader. It nicely sums up my concerns:
"It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
While Rome Burns
I hope the writer is wrong. But the ECB is dithering while Rome burns. (Or at least their banking system is -- Italy's banks have large exposure to Eastern Europe through Austrian subsidiaries.) They need to bring rates down and figure out how to move into quantitative easing. Europe is at far greater risk than the US.
Great Britain and Europe as a whole are down about 6% in GDP on an annualized basis. The Bank Credit Analyst sent the next graph out to their public list, and I reproduce it here. (www.bcaresearch.com) In another longer report, they note that the UK, Ireland, Denmark, and Switzerland have the greatest risk of widespread bank nationalization (outside of Iceland). The full report is quite sobering. The countries on the bottom of the list are also in danger of having their credit ratings downgraded.
Aggregate Sovereign Credit Risk
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged. (This was definitely a topic of "Conversation" this morning when I chatted with Nouriel Roubini. See more below.)
The Euro Back to Parity? Really?
I wrote over six years ago, when the euro was below $1, that I thought the euro would rise to over $1.50 (it went even higher) and then back to parity in the middle of the next decade. I thought the decline would be due to large European government deficits brought about by pension and health care promises to retirees, and those problems do still loom.
It may be that the current problems will push the euro to parity much sooner, possibly this year. While that will be nice if you want to vacation in Europe, it will have serious side effects on international trade. It clearly makes European exporters more competitive with the rest of the world, and especially the US. It also means that goods coming from Asia will cost more in Europe, unless Asian countries decide to devalue their currencies to maintain an ability to sell into Europe, which of course will bring howls from the US about currency manipulation. It is going to put pressure on governments to enact some form of trade protectionism, which would be devastating to the world economy.
Large and swift currency swings are inherently disruptive. We are seeing volatility in the currency markets unlike anything I have witnessed. I hope we do not see a precipitous fall in value of the euro. It will be good for no one. It is a strange world indeed when the US is having such a deep series of problems, the Fed and Treasury are talking about printing a few trillion here and a few trillion there, and at the very same time we see the dollar AND gold rising in value. Which all serves as a good set-up to the next section.
***********
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
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