>
> On Thu, Oct 23, 2008 at 9:51 AM, Scott wrote:
>
> And now a rumor that the IMF is putting together a $1 Trillion assistance
> package for EM
>
Thanks, IMF USD lending is functionally the same as Fed lending via swap lines.
This is on track to go the full route of a classic emerging market debt crisis.
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Excellent move!
Someone finally understands that the CB demanding collateral from its own regulated banks is redundant for ‘local currency’ lending to member banks.
The Fed should have done this long ago and saved a year of financial turmoil, as I’ve been proposing for a long time.
This means bank failures will be due to solvency, and not liquidity.
Ottawa to guarantee inter-bank lending
By Kevin Doherty
OTTAWA  Canada’s government will guarantee the lending the country’s banks do with other financial institutions.
Finance Minister Jim Flaherty said Thursday the government is establishing the Canadian Lenders Assurance Facility on a temporary basis to backstop wholesale lending.
Mr. Flaherty said he is establishing the lending facility to ensure Canadian banks aren’t left at a competitive disadvantage. More than a dozen countries have pledged hundreds of billions of dollars to guarantee interbank lending.
Banks will access the insurance from the facility on commercial terms. Mr. Flaherty said there will be no cost to taxpayers.
“This is a proactive step,” Mr. Flaherty told reporters. “There is this concern that our institutions could be disadvantaged competitively.”
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He’s not quite there. Yes, they need a ‘fiscal authority’ but he doesn’t see it’s function as providing the deficit spending necessary to sustain output and growth, though his mention of ‘currency printing’ could be stretched to suggest that. Instead, the focus is on collecting taxes to fund itself:
Agree. Eastern Europe is a huge problem and again much depends on what the Fed does because the ECB can only underwrite this stuff to the extent that the Fed will continue to offer the ECB unlimited swap facilities. Sarkozy gets this. He now recognizes the Achilles Heel at the heart of the EMU:
Speaking to the European Parliament on Tuesday, French President Nicolas Sarkozy said that an “economic government” partnering with the European Central Bank (ECB) was necessary for the continuation of the 15-nation eurozone  the collection of nations within the European Union that uses the euro as currency.
The financial and banking imbroglio consuming Europe has emphasized how the EU and specifically the eurozone  although impressive and supranational  are nonetheless unprepared for, and incapable of handling, wide-ranging economic crises. The European Union is not a superstate, despite the accusations of its detractors or the wishful thinking of its supporters. It does not have a unified decision-making authority on most policy issues except for those concerning the functioning of its common market, and those are primarily non-political.
The establishment of the eurozone is an impressive feat in its own right. It binds together 15 economies within the 27-member union with a common currency and a common central bank. However, the ECB and the eurozone in general lack a number of competencies that, if ever implemented, would have impinged on national sovereignty but would have also made monetary and economic sense. These include taxation, currency “printing”, decision-making on where to funnel funds in times of crises and European-wide bank regulation.
In times of plenty  which the eurozone has experienced for the most part since its inception  it may seem sufficient that the authority of the ECB is strictly limited to keeping inflation under 2 percent (a role inherited from its direct ancestor the German Deutsche Bundesbank). However, the current crisis illustrates the deficiency of this system. Without supranational taxation, the eurozone does not have the ability to make liquidity infusions into the system directly  it simply does not have any real cash of its own. In fact, Europeans have had to depend on the U.S. Federal Reserve for capital through unlimited dollar funds made available Oct. 13. A credit-starved Europe had to draw $250 billion  with hundreds of billions more potentially outstanding  on the first day the Fed announced that swaps would be unlimited.
Even with a taxation system that would supply the ECB with its own pool of funds, someone would still have to make a political decision regarding receivership of those funds.
Sarkozy may have tried to allay these fears by using the word “economic”  highlighting that the authority would not extend beyond the policy realm currently being rocked by the financial crisis. This is a valiant marketing effort for sure, but in reality one cannot separate the political and the economic “government”, especially if the eurozone receives authority over taxation or the ECB becomes responsible for deciding which banks get bailed out or which industries receive loans. Were the Europeans willing to go this far in giving up national sovereignty, they would have done it already.
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ECB on inflation- while interest rate cuts are likely (and in my honest opinion, won’t help anything), what they consider low unemployment and wage gains still a factor and making headlines and have been causing some footdragging.
Trichet May Need to Prove ECB’s Inflation Credentials (Update1)
By Ben Sills
“Whether that means inflation is suddenly going to fall enough is highly doubtful,” said Broux. “Unemployment is the lowest in a generation.”
While oil prices have halved in the past three months and inflation slowed to 3.6 percent in September, workers are demanding compensation for higher costs.
Germany’s IG Metall labor union is seeking an 8 percent pay increase, the largest in 16 years, and workers at Ireland’s Electricity Supply Board last month demanded 11.3 percent.
Germany preparing some kind of fiscal package, but still no details. The government and bond issuance is already set to gap up, and this will add to the systemic risk:
Germany is preparing a package of economic measures to support consumption and help selected industries as growth in Europe’s largest economy rapidly loses steam, government officials said on Wednesday.
The fiscal package is considered more than just an economic response to the financial crisis; it is also a political move aimed at making Berlin’s €500bn ($644bn, £395bn) rescue package for its banks more palatable to voters, a year ahead of a general election at risk of becoming overshadowed by the abrupt slowdown.
The government reduced its 2009 gross domestic product growth forecast last week from 1.2 to 0.2 per cent and several economists fear the economy could even shrink next year.
Meaning higher deficits.
Although details of what will be included are yet to be announced, the move confirms that Berlin is no longer aiming to balance the federal budget by 2011, once a central goal of Angela Merkel, the chancellor.
Government officials said on Wednesday Ms Merkel had appointed Jörg Asmussen, deputy finance minister, and Walther Otremba, deputy economics minister, to prepare a list of measures to support consumers and business that could be adopted as early as next week.
The growth-supporting efforts are thought to be tax incentives to encourage consumption of German products, such as new cleaner cars or energy-efficient heating systems for homes.
“We need measures that have leverage,” said Joachim Poss, a Social Democratic MP and public finance expert, adding that these should be limited in the time they were available.
One option would be to increase the budget of a 2006 programme of tax incentives to encourage consumers to insulate their homes.
The economics ministry is also keen for KfW Group, the public sector development bank, to provide 100 per cent loans to small and mid-sized companies, as they struggle to secure credit in the financial turbulence.
More controversial is the issue of tax cuts, largely because of Ms Merkel’s concerns, shared by Peer Steinbrück, the finance minister, that these could fail to increase consumption at a time the downturn is beginning toaffect tax revenues.
However, an economics ministry official said Mr Asmussen and Mr Otremba had not abandoned the notion of income tax cuts.
Alternatively, the government could decide to bring forward by one year a decision to allow taxpayers to deduct the cost of their health insurance from their tax bills, the official said.
The decision, forced upon the government by a court ruling, was due to apply from 2010 and would cost the federal and regional governments €9bn a year in total.
In contrast, China, with its own fiscal authority and non-convertible currency, has no solvency issue and can get the job done if they aren’t shy about it:
China says domestic demand boost can help economy
BEIJING, Oct 23 (Reuters) – China can overcome the tightening in economic conditions by boosting domestic demand, Chinese Premier Wen Jiabao said on Thursday.
“We can overcome the current difficulties through stimulating domestic demand,” said Wen after meeting German Chancellor Angela Merkel.
Merkel added: “We want to use the chances (we have) through an intense cooperation.”
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| Survey | 468K |
| Actual | 478K |
| Prior | 461K |
| Revised | 463K |
Hurricane added 12,000. Based on other economic stats and surveys this could get a lot worse.
| Survey | 3715K |
| Actual | 3720K |
| Prior | 3711K |
| Revised | 3726K |
A slight pullback. This is getting into recession levels.
| Survey | -0.5% |
| Actual | -0.6% |
| Prior | -0.6% |
| Revised | -0.8% |
A little worse than expected and rates of decline may have leveled off.
| Survey | n/a |
| Actual | -5.9% |
| Prior | -5.5% |
| Revised | n/a |
Still falling but at perhaps moderating rates.
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This seems to be on the way back up:
(The ECB/BOE/SNB lent out $140.8 billion last night for 28-days at 2.11%)
Haven’t seen the Fed’s current total swap lines outstanding, which could be telling.
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Europe adds to Bank Plans in Bid to Blunt Likely Recession
By David Gauthier-Villars and Leila Abboud in Paris, Sara Schaefer Munoz in London, and Mike Esterl in Frankfurt
Some European governments are looking at going beyond government aid to banks to help businesses, in an effort to inject money directly into the economy as lending remains stagnant and a continent-wide recession looms.
Italy’s government said Tuesday it was working on a package of economic-stimulus measures that could include guaranteeing corporate debt, a move that could give distressed Italian companies a new advantage over rivals elsewhere — and if enacted could set off a new round of cross-border competition, or complaints, about national aid.
Sounds highly inflationary, if the Italian guarantee is worth anything in the credit markets.
French President Nicolas Sarkozy called for the creation of sovereign-wealth funds to defend big companies from being bought up by non-Europeans at bargain prices, and proposed an “economic government” to coordinate euro-zone economic policy.
Also sounds highly inflationary as well as operationally problematic.
No talk of giving the euro parliament the fiscal authority to (deficit) spend their way out of the mess they have created.
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Here’s my proposal for banks that are presumably capital constrained:
Offer borrowers a package deal:
The borrower agrees to buy new bank VCP (variably convertible preferred) stock equal to, say, 10% of their proposed borrowings. This creates ‘balance sheet’ for the bank which then has the new ‘room’ to make the loan and then some. (Banks generally have 8% target capital ratios.)
The VCP functions as a ‘first loss piece’ for the bank as well.
Terms of the VCP might include an interest rate equal to the loan rate, and a variable conversion ratio designed to give the borrower all his funds back if he doesn’t default.
The VCP non-dilutive to the holders of common shares.
This VCP proposal can free up and create new balance sheet and raise capital as it services borrowing desires.
Feel free to forward this to everyone you know in banking.
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(email exchange)
And this only makes it worse:
Hungary Raises Benchmark Rate to Defend its Currency (Update2)
By Balazs Penz and Zoltan Simon
Oct. 22- Hungary’s central bank raised its key interest rate in an emergency measure to shore up the country’s currency, after it fell to near a record against the euro.
The Magyar Nemzeti Bank in Budapest raised the two-week deposit rate today to 11.5 percent, the highest since July 2004, from 8.5 percent, it said in an e-mailed statement. The move came two days after the bank left rates unchanged at its regular meeting. The last emergency rate increase was in 2003.
Governments are net payers of interest, so raising rates adds to governments spending on interest and raises costs of doing business and costs of investments- all ‘inflationary biases’ that further weaken the currency.
And a weaker euro (just saw it at about 129) means unrealized dollar losses across the Eurozone grow as a percentage of (eurodenominated) capital, pushing the banking system and the national governments pledged to support it towards insolvency.
>
> On Wed, Oct 22, 2008 at 3:08 AM, wrote:
>
> I wonder whether this will prove a tipping point for the euro:
> The willingness of the ECB to “bail out” a country that is not
> yet member of the Eurozone is quite significant and signals the
> concerns that EMU members now have about the disruptive
> effects of a crisis in Hungary. Of course, they can do it now
> that the have the sub-underwriter of last resort in the Fed.
> Also, the ECB liquidity support, unlike IMF conditionality loans,
> does not come with any attached string. The additional issues
> that the ECB action has caused are however important: if 5
> billion is not enough if the financial pressures intensify would
> the ECB lend more? Will the ECB do similar swaps with other
> Emerging Europe economies that are likely candidates – in the
> next few year – for EMU membership? Also should Hungary now
> use this additional international liquidity to prevent a further
> depreciation of its currency or should it save this additional
> ammunition in case things get worse?
>
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| Survey | n/a |
| Actual | -16.6% |
| Prior | 5.1% |
| Revised | n/a |
| Survey | n/a |
| Actual | 279.30 |
| Prior | 313.50 |
| Revised | n/a |
Looks like a cycle low, as scared consumers dig in.
| Survey | n/a |
| Actual | 1158.80 |
| Prior | 1514.20 |
| Revised | n/a |
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