Author Archives: WARREN MOSLER

Is this all they can come up with?

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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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VCP proposal for bankers

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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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Re: Hungary

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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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2008-10-22 USER

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MBA Mortgage Applications (Oct 17)

Survey n/a
Actual -16.6%
Prior 5.1%
Revised n/a

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MBA Purchasing Applications (Oct 17)

Survey n/a
Actual 279.30
Prior 313.50
Revised n/a

 
Looks like a cycle low, as scared consumers dig in.

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MBA Refinancing Applications (Oct 17)

Survey n/a
Actual 1158.80
Prior 1514.20
Revised n/a

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MBA TABLE 1 (Oct 17)

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MBA TABLE 2 (Oct 17)

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MBA TABLE 3 (Oct 17)

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MBA TABLE 4 (Oct 17)


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In over their heads

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The Fed and Treasury decided ‘the problem’ was the LIBOR/Fed funds spread and threw everything they had at it.

What finally did the trick was the Fed’s unlimited swap lines with the MOF, BOJ, ECB, and SNB.

Unfortunately that turned a technical problem into a fundamental problem, as I’ve previously described.

Back tracking to why they wanted LIBOR rates lower- they wanted to assist the mortgage market and consumer debt in general.

There were other ways to do this, such as my plan for uncollateralized lending to their own member banks where government already regulates and supervises all bank assets and insures bank deposits.

That would have eliminated the interbank market for Fed member banks.

Euro banks would have still been paying up for USD borrowings and been distorting LIBOR.

The next step would be to get the BBA to adjust the USD LIBOR basket to not include banks who had to pay substantially higher for funds than the US member banks.

(This is supposed to happen automatically but the BBA is dragging its feet as it did with Japan years ago.)

And this would have immediately gotten LIBOR and Fed funds back in sync.

Also, they could have expanded treasury funding for the agencies to make mortgages to member banks in general for the same purpose and lowered mortgage rates that way.

Point- lots of other/better/more sensible ways that don’t increase systemic risk than the policy of unlimited (and functionally unsecured) USD lending lines for foreign commercial banks.

The ‘cure’ seems a lot worse than the new problems it creates.

Note the euro falling fast…


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ECB tenders

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The ECB raised its day tender rate to 2.75% today and got far fewer tenders, as USD market rates had gone below that in anticipation of lower rates.

But that should just mean the USD ‘market rates’ will rise to over that level and the USD borrowers will come back to the ECB in big size as it’s just a game of musical chairs


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UK’s Brown- Right action for wrong reasons

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Brown set to borrow more (FT)

By George Parker and Norma Cohen

Gordon Brown on Monday insisted the government would spend its way through the downturn. Mr Brown said Britain’s debt-to-gross domestic product ratio of 37.6 per cent was lower than main competitors – the eurozone average is 56.4 per cent – and could sustain higher borrowing. “It is because we cut the national debt over the past few years that we are able to do what is the right thing.” The £37.6bn half-year borrowing figure is the highest since the second world war in nominal terms, although relative to the size of the economy it is below that of the 1993/4 fiscal year, when John Major’s Tory government was fighting a recession. Treasury estimates of growth in tax receipts are far short of those forecast at the start of the fiscal year, rising at only 1.9 per cent year-on-year instead of the 5 per cent rate that had been expected.


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Eurozone coming apart

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RLPC- European secondary loan prices breach 70 pct

By Zaina Espana

The low secondary loan prices reflect heavy forced selling by stressed investors that has also weighed on the battered LevX index of leveraged loan credit default swaps.

Around three billion euros of forced sales have flooded the thin and illiquid European secondary loan market in the last two weeks, several traders said.

The sales started with Icelandic banks’ portfolio sales and other European banks followed, but a portfolio sale from Sankaty last week marked a new phase of the selloff as managers of credit-driven collateralised loan obligation (CLO) vehicles started to throw in the towel, traders said.

Traders said Sankaty, the credit affiliate of private equity firm Bain Capital, put a $342 million portfolio of leveraged loans up for sale last Wednesday and fund manager Highland Capital followed in the United States with a $641 million portfolio of U.S. and European names.

Average bids on Europe’s top 40 leveraged loans have lost 225 basis points from last Friday’s level of 71.01 percent of face value to 68.76 on Monday, RLPC data shows.

While this madness continues, watch for results due out soon:

ECB Offers Banks Unlimited Dollars to Boost Lending (Update1)

By Christian Vits

(Bloomberg)- The European Central Bank offered banks unlimited amounts of dollars in two new tenders today as it steps up efforts to get financial institutions lending to each other again.

The Frankfurt-based central bank offered banks funds for 28 days via a currency swap in which it lends dollars against euros. In a separate tender with the same maturity, the ECB offered dollars against collateral at a fixed rate of 2.11 percent. In both cases it will fill all bids. Results will be published at 11 a.m. The loans start on Oct. 23 and mature Nov. 20.


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France injects €10.5bn in the six largest banks

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If growth continues to slow down this won’t be nearly enough to cover capital yet to be lost.

Also, with more slowing, the French deficit widens threatening their solvency and ability to fund:

France injects €10.5bn in the six largest banks; doubts about the 2009 GDP growth forecast

The French Finance Ministry said Monday night that the French government will inject E10.5 billion worth of fresh capital into the country’s six largest banks between now and the end of the year by purchasing subordinated debt securities.

Credit Agricole will get €3 billion, followed by BNP Paribas with €2.55 billion, Societe Generale with $1.7 billion and Credit Mutuel with €1.2 billion. Les Caisses d’Epargne will get €1.1 billion and Banques Populaires €950 million.

The banks have agreed to sell subordinated debt securities in those amounts, and they will carry a risk premium of about 400 basis points.


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