Banking crisis reaches eurozone
This weekend, the banking crisis arrived on our shores with a vengeance. Fortis Bank got bailed out by the Benelux governments, and Hypo Real Estate, Europe’s largest mortgage bank, received a last minute credit facility. Over in the UK, the UK government was about to nationalise the Bradford and Bingley building society.
The Beglian newspaper De Standaard reports that the governments of Belgium, Netherlands and Luxembourg pumped in €11.2bn to save Fortis, in exchange for a 49% stake in the bank. Negotiations were still under way to sell Fortis stake in ABN Amro, the Dutch bank, for which it bid as part of a consortium. Belgium invest €4.7bn, which is more than 1% of GDP. The Netherland pays €4bn. The combined equity stakes gives the three governments the de facto majority on the governing board. Fortis’ president Maurice Lippens will be forced to resign.
Frankfurter Allgemeine reports that the German government is not prepared to save Hypo Real Estate, which is based in Munich. The paper says that the bank could to file for bankruptcy proceeding under German law today after the failure of talks with other banks, including Commerzbank. However, early this morning, the worst seemed to have been averted for now, after the bank obtained a credit facility by a German banking consortium that is sufficient to tide it over now now. FT Deutschland reports that the cause for the probable insolvency is speculation by HRE’s Irish subsidiary, Depfa, which caught by the liquidity crisis, as it committed the classic banking error to lend long-term and to refinance in the very short-term. (So this might be only a liquidity problem, but we have to wait for more news.)
In the UK, the British government was preparing to bailout the Bradford and Bingley building society after agreeing a deal with Santander of Spain who will buy B&B retail mortgage book, plus the building societies 197 branches. Santander already owns Abbey and is taking over Alliance & Leicester. The FT reports that the opposition Conservatives are opposing the bailout on the grounds that it poses risks to the taxpayer.
In the meantime, the Americans agreed on the details of their $700bn rescue package. Here are the details, as reported by the FT: the plan foresee reimbursement by financial companies to the government, which effectively means that this plan does nothing at all in terms of recapitalisation of the banking sector. It also includes cutbacks on executive pay. The Republicans in Congress, which had opposed the plan of their own administration, remain sceptical, according to the FT report. Both presidential candidates endorsed it. Warren Buffett had earlier warned of the biggest financial meltdown in US history if they failed to act. The plan includes the full $700bn, to be released in three consecutive tranches, starting with $250bn right now. Congress has a vote on the final $350bn.
Paul Krugman says the plan is better than no plan, but it is still a bad plan. His analysis is that the US Treasury can conduct reverse auctions – this means there is only one buyer, the Treasury, and many sellers, and the lowest sales price is getting the nod – and the US government can buy directly, but only through equity warrents and senior debt. He says the first will be ineffective, though not too bad for tax payers. But firms in real trouble will stay away from the auction. The second is better though somewhat opaque. His conclusion is that this is not a good plan, but it may until the next administration arrives, and works out something better.
Wolfgang Munchau argues in his FT column that the crisis holds two important transatlantic lesson, going in opposite directions. The first, a lesson from Sweden, is that bank bailouts have to address bank capital first and foremost, and have to require holdings. This is not the case with the Paulson plan, as well as the deal that was finally agreed. The second lesson is that banking crisis require swift political agreements, as we have just seen in the US. If a crisis of this magnitude had descended on the eurozone, government would have been totally unprepared. At the present, there is no way the eurozone could agree on a bailout plan that quickly.
Larry Summers writes in his FT column that the deal is good for the US taxpayers, as have previous bailout by the US government, of Chrysler, of Mexico, which have all ended up making a profit. He says the idea that has taken hold in the public debate in the US that the country would have to tighten its belt as a result, for example on health care, is completely wrong.
Are hedge funds next?
The Naked Capitalism blog, citing varying British sources, reports that the hedge funds industry has been badly hit by the Lehman bankruptcy, and that it face massive redemptions. They will have to make big writedowns, which is going to add to the exodus from hedge funds. More redemptions mean security fire sales, as hedge funds have to balance their exposure. The great unwind is happening. In another post on the same subject, the blog reports: “We’ve produced 15% returns for 10 years. This year has been bad and our funds under management have been reduced from $2bn to just $300m. This is decimation.”
Moralising about the financial crisis
Pierre-Antoine Delhommais in Le Monde has a polemic comment on European politicians and Sarkozy in particular who moralise about the financial crisis while watching the US crisis to unfold. In particular he picks on three of Sarkozy’s statements. The first is what Sarkozy reiterated since his campaign that he prefers production over finance. Delhommais concludes that while there are no economic grounds for such a statement it could only reflect the personal taste of the president. The second statement is Sarkozy’s call to sanctionise the responsables for the crisis. So why not, asks Delhommais, then we should include all the politicians who benefited from the creation of financial wealth as well as all these Americans who took out a mortgage. Third is Sarkozy to blame Alan Greenspan for building up this bubble. This is more than cynical for a politician who always railed against Trichet’s over rigid monetary policy.
Steinbruck worries about US subsidiaries of German banks
The German finance minister Peer Steinbruck said he worried that the US subsidiaries of German banks are not including in the $700bn bailout package, an issue he says he wants to raise with the Americans.
Far right gained significantly in Austrian election
The Austrian election yesterday ended the historical lowest results for the two grand coalition parties and a huge gain for the two far right parties. According to the latest results in Der Standard the Social Democrats is again the largest party receiving 29.71% of the votes (down from 35%),the center right People’s party under Wilhelm Molterer 25.61% (down from 34%). On the far right, the radical Freedom party (FPÖ) rose from 11 to 18.01%, and its slightly more moderate rival, the Alliance for Austria’s Future (BZÖ), jumped from 4 to 10.98%. The leaders of the two parties, Heinz-Christian Strache and Jörg Haider, have been bitter rivals since Mr Haider broke away from the Freedom party in 2005 to set up his own group. The FT writes that without that split, the far-right camp could now be the strongest political force in the country. The outcome leaves few options for a stable government. Social Democratic leader Werner Faymann could revive the grand coalition but it would only have a slim majority in the parliament. A coalition with the Freedom party was ruled out and a minority government would bea break with political traditions. Wilhem Molterer, who called for the snap elections in protest of a more skeptical EU position of the Social Democrats in July, is expected to resign after the poor results. Der Standard quotes FPÖ leader Strache who already claims the chancellorship arguing that the chancellor cannot come from the Social Democrats, which just lost the peoples’ support.
Bavarian election shock
The CSU, which has governed Bavaria like a medieval fiefdom, has lost its absolute majority for the first time ever. As a result, it will have to enter into a coalition with the Free Democrats, but since the Free Democrats are not in government in Berlin, Angela Merkel can no longer count on Bavaria’s support in the Bundesrat, the upper chamber were her once mighty majority has shrunk to a single vote. A change of government power in the state of Hesse, where there is the prospect of a government including the far left, would deprive Merkel of her majority. See every German newspaper for saturation coverage.
Ireland to cut public spending
Yesterday the Irish cabinet started budget 2009 negotiations, which has been brought forward to October 14 due to the crisis in the state finances. It is expected to be the toughest budget since 1983. The Irish Independent has the story that spending is due to be cut by 2.5% on last year's €70bn figure, reversing years of continuous spending increases for government departments (though this reduction does not take account of inflation -- currently running at an average of 4.3pc for the last 12 months). No tax increases are on the agenda for now to close the estimated €7bn gap in the public finances. The cabinet has yet to decide how much will be borrowed -- with reports that the total could reach €10bn. The opposition accuses the finance minister already of doubling the public debt within his time in office.
European central banks cut gold sales
The FT has the story that European central banks have cut gold sales to the lowest level in a decade. The central banks bound by the Central Bank Gold Agreement sold a mere 343 tonnes, the lowest since the start of the CBGA in 1999.
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