G7/IMF meetings seen as last chance to avoid financial meltdown
The Dow at under 9000, overnight a 10% crash in Tokyo, the S&P now over 42% off its all-time peak last year, and this is not even the worst. That is the TED-Spread, the difference between 3-month Treasury bills and 3-month money market rates, yesterday jumped a new record of over 4%. This means that the money markets are compensating any Fed rate cuts. The crisis is beyond monetary policy. Just look at this chart.
Oil is now at $85, and falling. The markets are doubting the effectiveness of policies, whether they are monetary policies, or even bailout plans. And the IMF is warning about a severely economic downturn. Hank Paulson yesterday tweaked his bailout plan, emphasising voluntary recapitalisation – in contrast to the UK where recapitalisation is not voluntary. But this has no effects on markets in meltdown mode. All eyes are now on today’s G7 meeting and the weekend IMF meetings. If those produce the customary waffle, or half-hearted plans – a nontrivial possibility unfortunately - a systemic collapse of the global financial system becomes a high probability.
Yesterday, Vox published a booklet of essays by leading economists on what the G7 meeting should do, edited by Barry Eichengreen and Richard Baldwin. They say that this is the biggest financial and economic crisis in our lifetime, and requires urgent global action. They recommend three basic policy responses: quick bank recapitalisation, deposit and loan guarantees, and a macroeconomic stimulus, all three globally co-ordinated.
Writing in the London Times, Gordon Brown gave a summary of the plan he will propose over the weekend. First, every bank in every country must meet capital requirements to ensure confidence. Second, we need to open up again the money. Third, new international rules for transparency, disclosure and standards of conduct, and forth, recognition that national supervisory systems are inadequate in an inter-dependent world.
Willem Buiter also makes the point that we now have to guarantee money markets, and he criticises French suggestions that money market problems were confined to the US and the UK, while the ECB provides endless liquidity in Europe.
Brendan Keenan, writing in the Irish Independent, writes that the concerted interest rate cut convinced anybody that things are much worse than thought. One reason to worry about the crisis is the fact that all the insider elites -- governments, central bankers and the banks themselves -- seem totally to have underestimated its scope, severity and the path it would take. The central banks' actions raised the awareness that a global economic crisis is developing and if it is not contained, will add to the huge problems the countries already face. Only the central banks have acted in a co-ordinated way. Governments need to start doing the same.
Everybocy considers direct state purchase of banks
Angela Merkel gave a very cryptic answer to the question of whether her government was considering full-scale nationalisation. “Naturlly, in preparation for a co-ordinated European response, we have to see that we may not be able to exclude anything.” This mumbled response is very typical for the clarity and determination with which Germany has approached this crisis. Merkel then went on to say, incredulously, the government should first wait and see the effects of the recent action by central banks (we suppose that since monetary policy takes about nine months to have an effect, Ms Merkel might have to get to wait for a rather long time).
Full-scale nationalisation the only option
Paul de Grauwe makes a convincing argument, in our view, that the crisis has reached a stage which is beyond the reach of central banks alone, and that we are now at the point where there is only one policy option left: full-scale nationalisation. The essence of banking is borrow short, lend long, creating credit and liquidity in the process. This credit transformation process is now fatally broken, as banks not only mistrust each other, but more importantly mistrust each other banks’ ability to attract liquidity. This means that banks stop lending to healthy banks, as they mistrust the system. If left unchecked, this process would result in a deep depression. We have now reached a stage where full-scale nationalisation of the core parts of the banking system is the only option through which lending to the non-banking sector can be resumed. A Only after a new equilibrium has been reached, will the government be able to privatise its banks again.
The effect on the real economy
Naked Capitalism has an interesting entry on how the financial crisis affects international trade. The blog quotes a correspondent who writes about a squeeze on letters of credit in international shipping, citing an example that Citi would not accept a letter of credit from BNP Paribas. The correspondent is quoted as saying: “That means he can’t ship goods, which means that within 2 weeks, physical shortages of commodities begins to show up.” This is quite scary stuff.
European property markets under growing pressure
The Irish government was urged to buy up thousands of homes left empty by the property slump to reduce homelessness yesterday, reports the Irish Independent. A leading homeless charity claimed that, according to the 2006 census, there are 216,535 vacant homes in Ireland -- some 15% of the nation's entire housing stock. The government is urged to take advantage of the cheaper property prices to give a boost to the construction sector and increase availability of social and affordable housing.
House prices in the Netherlands have fallen for the first time since 1990. During the third quarter of 2008, the average sales price was 0.3% down on the second quarter, according to NisNews. The number of house sales during the third quarter was down by 13%. While there is a structural shortage of houses, a more difficult access to mortgages could seriously damage the housing market.
Italy’s Plan B
Corriere della Sera reports of a speech given by Giulio Tremonti in the Italian parliament yesterday, where he said that Italy’s emergency plan to recapitalise the banking system was not an action plan, but an emergency plan, which the government hopes and expects not to use. One of the reason for Italy’s hightened state of alarm is the high degree of short-term indebtedness by the corporate sector. According to Confidustria, Italian companies owe €850bn to banks, of which €420bn are due within the next year – so that demand for refinancing is very large. Tremonti also defended the idea of the European rescue plan on efficiency grounds.
Details on Greek deposit insurance scheme
Greek finance minister Giorgos Alogoskoufis is quoted by Kathemerini saying that a soon-to-be-introduced 100,000-euro state guarantee on bank deposits will apply for three years. Bankers estimate Greek bank deposits at €230bn. Ministry sources said the guarantee will apply to any saver who has parked funds in banks operating in Greece. In a separate article the Bank of Greece is reported saying that global financial and credit crisis is putting the brakes on the Greek economy with 3.3% growth (down from 4%) this year but the country's banking system remains in good shape. The rise in the level of deposit guarantees is intended to calm citizens, amid media reports that worried savers were withdrawing savings from banks.
Kaupthing activities suspended in Finland
The Finnish Financial Supervision Authority suspended all Finnish operations of Iceland's biggest bank Kaupthing after its Icelandic counterpart seized control of the bank, reports Newsroom Finland. It had stopped Kaupthing and other Icelandic banks from transferring money away from Finland on Monday. About 10,500 Finnish customers have a total of about €88m in Kaupthing accounts.
The FT reports about a dispute between the UK and Iceland, after the nationalisation of Icleandic banks put 800m Pounds of UK local authorities funds at risk. Britain is considering freezing the assets of Icelandic companies in the UK.
Interest rates cuts are too late
Thomas Fricke argues in Financial Times Deutschland that the Bundesbank, and its current representative in the ECB, have had a historic tendency to underestimate the impact of financial crisis. In 1987 and 1992, while some of the clearest danger signs were lurking on the horizon, the Bundesbank raised interest rates, only to revert a short-while later. The same happened again with the German-inspred rate increase in July, which came at a time, when the economy was already nosediving. Fricke appears to doubt the value of central bank independence,and favours greater control of central banks.
The end of the American century
Jean Marc Vittori in Les Echos sees the end of the American dominated century dooming. It took the US decade to achieve its financial preeminence in the world, a process that this financial crisis is about to end. While US treasury papers are still at the core of the international financial architecture, doubts among international investors increase. Vittori asks who is going to replace the US in their leading role in global financial markets? It is too early for China and Europe discredits itself by its disunity. The crisis is new so will be the world there after.
Writing in the FT, Philip Stephens also has a comment on the same subjects, looking at the geopolitical implications of this crisis.
What to expect from the Czech EU presidency?
In Liberation the historian Etienne Boisserie is trying to assess what will happen when the Czech president Vaclav Klaus takes over the EU presidency next January. Eurosceptic, liberal orthodox and critical of the member states response to the crisis it will be a clear break with the hyperactive presidency of Nicolas Sarkozy. Neither the Czech government nor the central bank see any reasons to intervene and critised the EU of adopting artificial solutions instead of rational ones. Boisserie ends by asking how such a liberal rhetoric adapts to the crisis management the EU might need. The answer will be known in three months
Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.