[top]
| Reference Entity | 5 yr | 10 yr |
| Germany | 53/63 | 55/65 |
| France | 57/67 | 59/69 |
| Austria | 145/160 | 142/156 |
| Ireland | 275/310 | 270/308 |
| Italy | 175/195 | 175/195 |
| Netherlands | 110/128 | 110/130 |
| Greece | 285/310 | 280/280 |
| Belgium | 110/135 | 108/133 |
| Spain | 140/155 | 138/152 |
| Portugal | 138/152 | 133/150 |
| UK | 130/140 | 120/145 |
** Another leg of aggressive widening in SOV CDS with UK out 20bps, Ireland out 40bps, Portugal/Spain/Italy/Greece out 15/20bps! Seen small buying flows in Belgium/Austria & Italy.
[top]
Seems government has it wrong again?
First, government has not acted to sustain aggregate demand- the primary economic responsibility of a taxing authority.
Yes, it’s sort of trying in bits and pieces, but has not taken immediate action to restore demand at levels at least 5% higher than where it is currently.
What banks need most is borrowers who have the income to afford their payments.
This is a simple matter of immediate tax cuts as well as sustaining funding for desired government services.
This requires nothing more than data entry on their sterling spread sheet.
Regarding current bank solvency issues:
If the UK government wants its banks to continue to function they can do that by simply providing unsecured loans from the BOE to fund bank operations, including lending.
No bank need ever shut down if government understands its role of not making the liability side of banking the place for market discipline.
Government can and does outlaw any banking activity if deems does not meet the test of public purpose.
Bank capital is the loss buffer between losses and government guaranteed deposits.
If bank capital is below required government standards (presumably determined for public purpose) all that means is any risk of loss for the bank is that much closer to being a loss for the government.
Adding government capital doesn’t change that, so it’s redundant in that sense.
If the government wants to sustain the operations of a private bank with deficient capital and there is no private risk capital available, it does so (for what they determine to be further public purpose) at risk of loss.
Any such loss to government is the ‘cost’ of the public purpose of sustaining those banking services, just like other public services have ‘costs’ such as the military, public roads, etc.
(At the macro level, the real costs are the real resources tied up in banking vs the real benefits of enhanced useful output.)
What to do with the UK banking system?
They have all kinds of VAT type taxes that can be adjusted to immediately restore spending power and enable borrowers to make their loan payments.
Waiting for current fiscal measures to do this will eventually work through the ‘automatic stabilizers’ but will take a lot longer with a much higher loss of real output.
Some of this is happening, but it is not organized around an expressed agenda of ‘further public purpose’.
A clear vision statement regarding public purpose itself serves public purpose.
Unfortunately, the institutional structure in the eurozone does not allow for this type of government response.
They have to rewrite the treaty or wait through an ugly deflationary contraction for exports to recover, providing market participants continue to support them, which is doubtful at best.
(As always, feel free to distribute)
Irish, British Banks Head Towards Zero On Nationalization Concerns
Jan 19 (Global Economic Analysis) — Equity prices in the three remaining Publicly Traded Irish Banks Collapse after Anglo Irish Bank was nationalized.
In afternoon trade, Allied Irish shares were down 62%, Bank of Ireland fell 49% and mortgage and insurance specialist Irish Life & Permanent dropped 41%.
Analysts said shares in Allied Irish and Bank of Ireland were being hit particularly hard because of growing investor fears that the banks’ existing shares will be heavily diluted when both banks formally accept billions in government investment this spring. Shares in the Dublin-based bank had fallen 98% over the past year on the back of bad debts and corporate scandal.
The government had previously proposed taking a 75% stake in Anglo Irish at a cost of 1.5bn euros (£1.36bn; $1.97bn). But it dramatically opted for a full takeover on Thursday, on the eve of an emergency shareholder meeting called to approve the earlier government investment.
Nationalization Concerns Sink RBS
Bloomberg is reporting RBS Plummets Amid Concern Bank May Be Nationalized.
Royal Bank of Scotland Group Plc slumped by the most in two decades in London trading on concern the government may have to take full control of the bank after forecasting the biggest loss ever reported by a U.K. company.
The stock dropped 67 percent, the most since September 1988, to 11.6 pence, paring the Edinburgh-based lender’s market value to 4.6 billion pounds ($6.7 billion).
[top]
Obama Needs ‘Yes We Can’ Abroad to Help End Global Recession
by Rich Miller
Jan 19 (Bloomberg) — The U.S. led the global economy into its worst recession in at least a quarter century. Now the rest of the world is looking to Barack Obamato lead the way out. The trouble is, even the incoming commander-in-chief of the biggest economy can’t do it alone.
Yes he can!
And we would be better off if we did it ourselves.
With industrial nations suffering their first synchronous decline since World War II, Obama needs policy makers in other countries to pull their weight.
No he doesn’t!
He also requires a resurrection of animal spirits — among investors, banks, companies and consumers — if his government-led effort to revive growth is to succeed.
No he doesn’t!
“We’re facing a more pervasive, more widespread downturn in the global economy than ever before,” says Allen Sinai, chief global economist at Decision Economics in New York. “It cries out for other countries to stimulate their economies, and stimulate them strongly, rather than to rely on a U.S. upturn to recover.”
No it doesn’t!
‘Sweeping Effort’
Obama has said the budget package won’t solve all America’s ills.
Right, but the right fiscal package can solve the current financial ill- lack of domestic demand- in a matter of weeks.
In a Jan. 8 speech, he called for a “sweeping effort” to help people who face foreclosure remain in their homes. He pledged to prevent “catastrophic failures” of banks and promised to overhaul “weak and outdated” financial regulation.
That won’t do much for the macro economy in the immediate future.
While Obama, 47, may be trying to temper expectations in the U.S., “hopes are high in Asia” that the U.S. stimulus will help countries there weather a collapse in exports, says Tim Condon, head of Asia research at ING Groep NV in Singapore. “They were pushed into trouble by an external shock and so want another one to help them accelerate their way out.”
Let’s give it to them and thereby improve our real terms of trade dramatically!
Condon says he doubts the Obama plan will be much help to the region. About $550 billion of the program consists of spending on such things as roads, bridges, education, health care and other domestic projects that would do little to boost America’s imports from Asia or elsewhere.
Agreed, the fiscal package needs to be larger/better:
Pitching In
No matter how much governments do, it won’t generate a lasting recovery unless companies, banks and consumers also pitch in.
Yes it will!
“Fiscal expansion can’t be the answer forever,” says Peter Hooper, a former Federal Reserve official who’s now chief economist at Deutsche Bank Securities in New York.
The right fiscal balance always has been and always will be ‘the answer’.
“You need to get private spending going again. You need to get the financial sector working again.”
No you don’t.
That may take a while. U.S. retail sales fell for the sixth straight month in December, the longest string of declines in records going back to 1992, as the credit crunch led Americans to cut back on everything from eating out to buying cars.
For his part, Obama says he is under no illusion that things can be turned around anytime soon.
“There are no quick or easy fixes to this crisis,
Yes there are!
which has been many years in the making, and it’s likely to get worse before it gets better,” he said last month. “But now is the time to respond with urgent resolve to put people back to work and get our economy moving again.”
A mid February package from Congress is not urgent resolve.
Congress has been dragging its feet since it was clear in October that something had gone very wrong with aggregate demand.
It is amazing that the media keeps going back to pundits who got it wrong during the boom and continue to get it wrong in the bust. The US does not need foreign help to restore its economy. It does not need to resolve problems in the banking sector before it can restore its economy. All it needs is a sufficient fiscal stimulus to create jobs, restore consumer demand, and improve private sector balance sheets. This will pull along the financial sector and the foreign sector. US banks will not work their way out of insolvency and begin lending again until the economy starts to recover. While it is in the interest of sovereign foreign nations to use their own fiscal stimulus to restore growth, their governments wrongly depend on export-led growth models thus will wait until the US recovers. So the solution is fiscal stimulus in the US, likely on a scale that is at least twice as big as what Obama is pushing. And there is no need to get into a fight about whether it ought to be tax cuts or spending increases–the answer is that we need both: a payroll tax holiday, public infrastructure, direct job creation, and help for state and local governments.
[top]
Got some new players as well!
Bank of Korea to Supply $3 Billion to Local Banks
Jan 19 (Korea Times) — South Korea’s central bank said Monday it will provide $3 billion to local banks suffering from a dollar liquidity crunch in the wake of the U.S.-sparked global financial turmoil, Yonhap News reported Monday.
The Bank of Korea (BOK) said the money is part of a $30 billion currency swap agreement it signed with the U.S. Federal Reserve in late October. The BOK has tapped $13.35 billion out of the swap line so far.
The central bank plans to hold an auction Tuesday and the loans will mature in 84 days.
The move comes amid rising market jitters about South Korea’s falling foreign exchange reserves, the world’s sixth-largest.
The country’s foreign reserves, which totaled $201.22 billion as of the end of December, fell for eight consecutive months in 2008, before climbing slightly in December as a weaker U.S. dollar boosted the dollar value of assets in other currencies.
South Korea also reached new currency swap arrangements with China and Japan in late December, expanding its existing swap lines with the two countries to $30 billion each.
[top]
He touches on the domestic demand issue, highlighted below.
And while sterling is going down versus the euro, more important is the fiscal response in the UK vs the eurozone.
Also, Germany and France are probably not in any position to help, even if they wanted to.
Help Ireland or it will exit euro, economist warns
by Ambrose Evans-Pritchard
Jan 19 (Telegraph) — “This is war: countries have to defend themselves,” said David McWilliams, a former official at the Irish central bank.
“It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe,” he told RTE radio.
“If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece,” he said.
Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone’s southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU’s Lisbon Treaty.
“If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down,” he said.
Mr McWilliams cited the example of New York’s threat to default in 1975. President Gerald Ford “blinked” at the 11th hour and backed a bail-out to prevent broader damage.
As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97pc reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever’s ex-chief Niall Fitzgerald.
“The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity,” Mr Fitzgerald said.
Mr McWilliams said EMU was preventing Irish recovery. “The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.
“We are paying twice for the euro: once on the exchange rate and once more on the interest rate,” he said.
“By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? ” he said.
[top]
These are functionally unsecured loans from the Fed to central banks of foreign governments.
The Fed loans USD and gets local currency deposits as collateral held at the foreign central bank.
If the central bank defaults to the Fed, its only recourse is to try to sell those foreign currency deposits in the open market. There are two problems with this. First, the foreign central bank may not allow the Fed to do this. Second, looking at the advances in total which are close to $600 billion, there probably is no amount of foreign currency that could be sold to get that many USD, without enough disruption for the foreign CB to stop the sale.
It get worse. Has Congress noticed that the Fed has the authority to make functionally unsecured loans to foreign governments? The line to Mexico is $30 billion. Would congress approve an unsecured loan to Mexico of $30 billion?
This is madness?
Lastly, the line to the ECB is now unlimited as reported. The ECB is not guaranteed by the eurozone National Governments, nor does it have any non-euro capital to speak of.
So the question for Congress is, should the Fed be underwriting unsecured credit to foreign Central Banks?
Dollar Swaps: Bernanke’s $520-Billion Novelty
by David Wessel
Jan 15 (Wall Street Journal) — What Federal Reserve Chairman Ben Bernanke terms “a novel aspect of the current situation†is the strong demand for U.S. dollars from overseas banks that had lent money in dollars or bought dollar-denominated securities.
To satisfy this demand and minimize strains on U.S. money markets, the Fed a year ago began offering dollars the European Central Bank, Swiss National Bank, Bank of England and other foreign central banks  which can print unlimited amounts of euros, Swiss francs, pounds etc., but not dollars. In exchange for dollars, the foreign central banks give the Fed their own currencies to hold.
The ECB and other central banks then lend the dollars to their banks, attempting to ease strains in their markets (and taking any risk that their banks won’t pay back the loans.) “The emergence of dollar funding shortages around the globe has required a more internationally coordinated approach among central banks to the lender-of-last-resort function,†Bernanke has said. (Read a primer)
The Fed’s policy-setting Federal Open Market Committee initially set ceilings on the currency swaps with each foreign central bank. But last year it lifted those ceilings, and now says it’ll give foreign central banks as many dollars as they want.
The Fed itself doesn’t disclose precisely how many dollars it has swapped with other central banks. Fed watchers do estimate the amount from balance sheet information that the Fed does disclose, and from disclosures by other central banks  including the ECB.
It turns out that the U.S. Treasury’s public statements of the U.S. International Reserve Position has a line that reveals exactly how many dollars the Fed has swapped with the ECB and other central banks. New Treasury data out today (See Table 2, Line 2(a)) reveals that as of January 9, 2009, the Fed had outstanding swaps of $520.26 billion in dollars with other central banks.
[top]
Seems something that maybe should involve Congress, along with the other near $600 billion outstanding draws?
Peru Seeking Currency Swap Lines With US Fed, China
by Robert Kozak
Jan 15 (Dow Jones) — Peru has begun talks with the U.S. Federal Reserve and China’s central bank with the aim of setting up currency swaps, Finance Minister Luis Valdivieso said Thursday.
These would be part of a strategy of having access to various measures to confront any economic slowdown that could affect Peru’s economy, he said at press conference with the foreign press.
[top]
| China Central Bank Attacks Paulson’s ‘Gangster Logic’ |
| China to Enact Stimulus Plan for Nine Industries, Minister Says |
| China’s Economy Faces 2009 ‘Hard Landing,’ Fitch Says |
| China not to blame for crisis: Experts |
Couldn’t agree more!
Let them export their brains out, while we sustain domestic demand with lower taxes/higher federal spending.
It’s all to our advantage!
China Central Bank Attacks Paulson’s ‘Gangster Logic’
by Li Yanping
Jan 16 (Bloomberg) — A Chinese central bank official attacked reported comments by U.S. Treasury Secretary Henry
Paulson that China’s high savings rate helped trigger the global credit crisis.
“This view is extremely ridiculous and irresponsible and it’s ‘gangster logic,'” Zhang Jianhua, the bank’s research head,
said. His comments were in an interview with the state-run Xinhua News Agency, posted on a government Web site today.
[top]
| Gieve Says Bank of England Rate Cuts Not Yet Felt |
They are being felt- the economy is getting worse, until the budget deficit gets large enough.
| UK Business Confidence At New Low, Fear Of Tough ’09 –Lloyds |
| Brown to Pledge 200 Million Pounds to Limit Home Repossessions |
| U.K. Stocks Rise for First Time in Eight Days; Royal Bank Gains |
[top]