America slides deeper into depression as Wall Street revels
Agreed.
Sad part is it can all be reversed with a few simple spread sheet entries. A full payroll tax holiday and per capita revenue distributions to the states to restore demand, output, and employment
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There is no operational support for this scenario. Comments below:
Global bear rally will deflate as Japan leads world in sovereign bond crisis
By Ambrose Evans-Pritchard
Jan. 5 (Telegraph) —
Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.
With non convertible currency this makes no sense. If deficit spending does generate excess demand and inflation short rates will rise if markets anticipate BOJ rate hikes as a BOJ reaction function to inflation.
Once the dam breaks, debt service costs will tear the budget to pieces.
That statement has no operational meaning. All payments in yen, dollars, sterling, etc. Are met in one way only- changing numbers upward in member bank reserve accounts. Operationally there is no ‘financial stress’ associated with this process.
Yes, excess deficit spending can cause the currency to fall and inflation, but to get out of a hole first you have to stop digging, and right now the currency is strong and deflation continues as the main concern.
The Bank of Japan will pull the emergency lever on QE.
A non event, apart from somewhat lower term rates.
The country will flip from deflation to incipient hyperinflation.
Not from QE. There is no channel from QE to the real economy, lending, or anything of consequence apart from (modestly) lower term rates.
The yen will fall out of bed, outdoing China’s yuan in the beggar-thy-neighbour race to the bottom.
Yes, excess deficit spending can cause the yen to fall and inflation to increase via the import/export channels.
By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.
China will also reach political limits only when inflation becomes a political problem.
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Yes, interesting to see if the Eurozone national governments are able to run their deficits as high as projections indicate without themselves having liquidity issues, even with the indirect help from the ECB. Looks to me like all the support measures add to the deficits of the national govts.
On Tue, Aug 18, 2009 at 4:57 PM, Russell wrote:
Regardless of your view on the economy, you have to at least consider the possibility that the financial crisis isn’t over, that we may just be in the eye of the storm. There are all the smaller (but still big) banks failing, as well as the lingering concerns over mortgages, commercial real estate and the national debt.
According to The Telegraph’s Ambrose Evans-Pritchard, the German government is laying the groundwork to head off a second coming of the credit crisis:
“The most difficult phase for financing is going to be in the first and second quarter of 2010,” said Hartmut Schauerte, the economic state secretary.
“We are working as a government to create instruments that can offset a feared credit crunch or any credit squeeze in sectors of the economy,” he said.
Mr Schauerte said firms with weak balance sheets may struggle to roll over loans as they come due in coming months. Negotiations with banks could prove “very difficult”.
State support is likely to be concentrated on boosting the capital base of German firms and providing credit insurance for exporters, perhaps to the tune of €250bn to €300bn (£256bn). “If this service fails, we are going to see dozens of credit collapses,” he said.
Articles:
Germany braces for second wave of credit crunch
Germany Prepares For Credit Crunch Part II
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Completely agreed about the possibility of a bank blow up.
And it’s also possible the government plan blows up the government.
The eurozone is the region vulnerable to ratings downgrades- both banks and national governments.
Not the UK and US governments where spending is not revenue constrained.
The ECB can ‘save’ the eurozone but only by extending credit beyond that ‘permitted’ by the treaty which in some ways they have already done.
This warning comes from a financial regulator:
German debts set to blow ‘like a grenade’
by Ambrose Evans-Pritchard
May 25 (Telegraph) — German debts set to blow ‘like a grenade’
Germany’s financial regulator BaFin has warned that the toxic debts of the country’s banks will blow up “like a grenade” unless they take advantage of the government’s bad bank plans to prepare for the next phase of the crisis.
German Chancellor Angela Merkel’s bad bank plan has been heavily criticised Photo: EPA
Jochen Sanio, BaFin’s president, said the danger is a series of “brutal” downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. “We must make the banks immune against the changes in ratings,” he said.
The markets will “kill” banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. “We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios,” he said, speaking after the release of BaFin’s annual report last week.
The International Monetary Fund (IMF) has called for a stress test for Europe’s banks along the lines to the US Treasury’s health screen, saying the region “urgently needs to weatherproof its institutions”.
The IMF said European institutions have written down less than 20pc of projected losses of $900bn (£566bn) by 2010. Euro area banks will have to raise a further $375bn in fresh capital, compared with $275bn for US banks. The Tier one capital ratio is 7.3pc in Europe, and 10.4pc in the US.
The German bad bank plan has been heavily criticised as an attempt to brush the problems under the carpet until after the elections in September. It allows banks to spread losses over 20 years in an off-balance sheet vehicle – much like the “SIVs” that masked their extreme leverage in the first place – and risks repeating the Japanese error of letting “zombie” banks limp on rather than purging the system.
The recession has hit Europe much harder than expected. German GDP has contracted by 6.9pc over the last year, and the eurozone as a whole has shrunk 4.6pc, although there are signs that the economy may be through the worst.
Germany’s IFO business confidence index rose to 84.2 in May, the highest since December, and German exports have started to rise again after a catastrophic fall of 16pc. But Carsten Brzeski from ING said it is too early to celebrate.
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Starts off good and then goes bad.
Britain looks to the land of the rising sun with envy
by Ambrose Evans-Pritchard
May 22 (Telegraph) — Perhaps most surprising is that Japan fell in 1998, though it was by then
the world’s top creditor with more than $1.5 trillion of net foreign assets
(now $3 trillion). Lender abroad, it is a mega-debtor at home, the result of
Keynesian pump-priming to fight perma-slump. The stimulus vanished into
those famously empty bridges in Hokkaido.
“The Japanese didn’t take the downgrade seriously,” said Russell Jones, of
RBC Capital, a Japan veteran from the 1990s. “They didn’t think they would
have any trouble funding their debt.”
They were right. Yields on 10-year bonds fell to 1pc by the end of the
decade, and to 0.5pc in the deflation scare of 2003 – confounding those who
expected Japan’s emergency stimulus to stoke inflation and push up yields.
Eisuke Sakakibara, then the finance ministry’s “Mr Yen”, was insouciant
enough to swat aside the Moody’s downgrade as an irrelevance. “Personally, I
think if Moody’s continues to behave like that, the market evaluation of
Moody’s will go down,” he said.
Japan had a crucial advantage: its captive bond market. Some 95pc of
government debt was held by Japanese savers or the big pension funds.
Not! Does not matter. The funds to buy government securities ‘come
from’ the government deficit spending.
Deficit spending adds reserve balances at the central bank,
buying govt securities reduces reserve balances at the same central bank.
It is all a matter of data entry by the central bank its own spread sheet.
The foreign share of UK public debt has risen from 18pc to 34pc over the
past six years. The central banks of Asia, Russia and emerging economies
like gilts because they offered 1pc extra yield over bunds. This was the
“proxy euro” trade.
Does not matter.
“We’re far more vulnerable than Japan ever was,” said Albert Edwards, global
strategist at Société Générale.
Wrong!!!
“Japan had a huge current account surplus
and a strong currency. The UK is a deficit country, at risk of a sterling
collapse.
Yes, the currency might go down, but seems to be doing ok for the moment!
Years of UK macro-mismanagement have dragged the UK economy to the
edge of a precipice.”
As the BOE’s Charles Goodhart once responded,
Yes, they have been telling us that for 300 years.
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ECB cuts to 2.5pc and mulls “printing money”
By Ambrose Evans-Pritchard
The Maastricht Treaty prohibits the ECB from injecting stimulus by purchasing the government debt of the eurozone’s fifteen states debt — a method known as “monetizing the deficit” or, more crudely, as “printing money.”
But it can achieve the same effect
not quite
by mopping up sovereign debt, mortgage securities, or even company debt on the open market, as the Fed has already begun to do. At the moment the ECB accepts some of these assets as collateral in exchange for loans, but it has not yet hit the atomic button by buying them outright with its own freshly-minted fiat money.
When the ECB accepts collateral for loans, it doesn’t offer non recourse funding. The owner of the securities remains liable in the case of default.
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Yesterday’s news, but this kind of response is indicative of fear of a very large problem in the immediate future.
And forcing banks to lend to entities they don’t consider credit worthy only shifts private sector losses to the banks.
>
> On Tue, Nov 4, 2008 at 7:38 AM, Dave wrote:
>
France threatens to seize banks, German bail-outs escalate
By Ambrose Evans-Pritchard
The French state has threatened to seize control of the country’s banks and fire top staff unless they do their part to stabilise the economy by stepping up lending to companies in need.
“The banks have got to open up credit to business: they have the means to do it,” said prime minister Francois Fillon, accusing lenders of hoarding cash. “We don’t think the banks are stepping up to task as necessary. We can withdraw the credit that we have extended to them under the state’s contract with the banks, and that will put them in difficulty. At that moment the question arises whether we should take an equity stake, change their managers, and assume control over their strategy.”
Speaking on French television, he warned: “Broadly speaking, we’ll be able to judge over the next 10 days whether they are playing the game as they should, or not.”
Under last month’s rescue deal, banks agreed to raise lending to firms and households by 3pc to 4pc in exchange for a state injection of €10bn (£8bn) in fresh capital for the six largest banks, a modest sum compared to the bail-outs in Britain, Germany, Belgium and the Netherlands.
In Germany, HSH Nordbank – 59pc owned by the city of Hamburg and state of Schleswig-Holstein – rattled the markets yesterday by revealing that it would need €30bn in guarantees from Berlin’s €500bn stabilisation fund. It warned that further sums may be need`ed to meet capital adequacy ratios in the future.
“We are not under time pressure and will be holding in-depth discussions with our stockholders as to the strategy to pursue,” said Hans Berger, chief executive officer. The bank has had to write down €2.3bn over the last year, and suffered heavy losses from the collapse of Lehman Brothers.
Commerzbank said it would seek a combined guarantee and capital boost of €23bn, while BayernLB will seek €5.4bn. The giant property lender Hypo Real Estate is the biggest casualty so far, needing €50bn.
In Austria, a mini-crisis continued to simmer yesterday as the state stepped in “with a few hundred million” to rescue Kommunalkredit, after the public lender said it was suffering a “liqudity squeeze”. Austria’s banks have heavy exposure to the debt crisis in Ukraine, Hungary and the Balkans.
Europe’s banks are almost twice as leveraged as those in the US, according to the IMF. Many pursued a very aggressive lending strategy during the credit bubble. They account for the lion’s share of cross-border loans to Latin America, Asia and the entire $1.6 trillion pool of loans to Eastern Europe. Matt King, credit strategist at Citigroup, says they have waited too long to face up to their losses and will need to raise $400bn in fresh capital in a hostile global climate.
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Highlights are in yellow. Problem is it needs a fiscal response, and this all has nothing to do with interest rates.
Banking crash hits Europe as ECB loses traction
by Ambrose Evans-Pritchard
(Telegraph) Analysts say German finance minister Peer Steinbrueck may have spoken too soon when he crowed last week that the US would lose its status as a superpower as a result of this crisis. He told Der Spiegel yesterday that we are “all staring into the abyss.”
Germany — over-leveraged to Asian demand for machine tools, and Mid-East and Russian demand for luxury cars — is perhaps in equally deep trouble, though of a different kind.
The combined crises at both Fortis and Dexia have sent tremors through Belgium, which is already traumatized by political civil war between the Flemings and Walloons. Fortis is Belgium’s the biggest private employer.
It is unclear whether the country has the resources to bail out two banks with liabilities that dwarf the economy if the crisis deepens, although a joint intervention by the Netherlands and Luxembourg to rescue Fortis has helped Belgium share the risk. Together the three states put E11.2 billion to buy Fortis stock.
This tripartite model is unlikely to work so well in others parts of Europe, since Benelux already operates as a closely linked team. The EU lacks a single treasury to take charge in a fast-moving crisis, leaving a patchwork of regulators and conflicting agendas.
Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed.
“We are at imminent risk of a credit crunch. Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too,” he said.
Data from the International Monetary Fund shows that European banks hold 75 percent as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US.
The interest spread between Italian 10-year bonds and German Bunds have ballooned to 92 basis points, the highest since the launch of the euro. Bond traders warn that the spreads are starting to reflect a serious risk of European Monetary Union breakup and could spiral out of control in a self-feeding effect.
As the eurozone slides into recession, the ECB is coming under intense criticism for keeping monetary policy too tight. The decision to raise rates into the teeth of the crisis in July has been slammed as overkill by the political leaders in France, Spain, and Italy.
Mr Sarkozy has called an emergency meeting of the EU’s big five powers next week to fashion a response to the crisis.
Half of the ECB’s shadow council have called for a rate cut this week, insisting that the German-led bloc of ECB governors have overstated the inflation risk caused by the oil spike earlier this year.
Jacques Cailloux, Europe economist at RBS, said the hawks had won a Pyrrhic victory by imposing their hardline monetary edicts on Europe. “They have won a battle but lost the war. The July decision will hardly go down in history books as a great policy decision,” he said.
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[written on Sunday]
While not a problem in the US for the Fed to do this and more (in fact it should be standard operating procedure), the eurozone has self imposed treaty issues that make it very problematic.
If there are defaults its the national governments that will probably be called on to repay the ECB for any losses, but given the national governments didn’t approve the transactions the result will be chaotic at best.
Without bank defaults it will probably all muddle through indefinitely.
As before, the systemic risk is in the eurozone.
Valve repair tomorrow, going to try to smuggle in a knife under my gown to even the odds…
Bank borrowing from ECB is out of control
by Ambrose Evans-Pritchard
The European Central Bank has issued the clearest warning to date that it cannot serve as a perpetual crutch for lenders caught off-guard by the severity of the credit crunch.
Not Wellink, the Dutch central bank chief and a major figure on the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt and were putting the authorities in an invidious position.
“There is a limit how long you can do this. There is a point where you take over the market,” he told Het Finacieele Dagblad, the Dutch financial daily.
“If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding,” he said.
While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and ‘cajas’ with heavy exposed to the country’s property crash. Dutch banks have also been hungry clients at the ECB window.
One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.
“Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks,” said the source.
This “soft bail-out” is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.
The latest data from the Bank of Spain shows that the country’s banks have increased their ECB borrowing to a record €49.6bn (£39bn). A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt.
These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed, making it very hard to roll over loans as they expire.
The ECB has accepted a very wide range of mortgage collateral from the start of the credit crunch. This is a key reason why the eurozone has so far avoided a major crisis along the lines of Bear Stearns or Northern Rock.
While this policy buys time, it leaves the ECB holding large amounts of questionable debt and may be storing up problems for later.
The practice is also skirts legality and risks setting off a political storm. The Maastricht treaty prohibits long-term taxpayer support of this kind for the EMU banking system.
Few officials thought this problem would arise. It was widely presumed that the capital markets would recover quickly, allowing distressed lenders to return to normal sources of funding. Instead, the credit crunch has worsened in Europe.
Not to miss out, Nationwide recently announced that it was setting up operations in Ireland, partly in order to be able to take advantage of ECB liquidity if necessary. Any bank can tap ECB funds if they have a registered branch in the eurozone, although collateral must be denominated in euros.
Jean-Pierre Roth, head of the Swiss National Bank, complained this week that lenders were getting into the habit of shopping for funds from those authorities that offer the best terms. The practice is playing havoc monetary policy.
“What we should avoid is some kind of arbitrage by banks, which say they are going to go to central bank X, instead of central bank Y, because conditions are more attractive,” he said.
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(an email exchange)
>
>  On Tue, Jun 10, 2008 at 8:12 AM, anonymous wrote:
>
>  Fisher’s remark induces one to wonder if Ambrose Evans-Pritchard is
>  correct in stating that Fed policy is now being concocted from Dallas.
>
>  The recent spate of criticism directed at Bernanke and Fed doves by
>  various current and past Fed officials, including Paul Volcker, implies
>  that there has been a revolt within the Fed. Mishkin’s resignation
>  supports the view that the hawks have won.
>
>
Agreed. I’ve been calling it a ‘palace revolt’.
Bernanke’s limit was inflation expectations as anticipated back in August, but he let it go a lot further than I thought he would.
The dallas crew is confused on a lot of things as well, but inflation expectations are the unifying force of the FOMC right now. When Yellen cried uncle, that was my signal.
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