Credit crunched in 2009
The IMF is forecast a sharp contract in euro area credit growth to about 2 or 3%, which will lead to a de facto economic stagnation in 2009. In its latest regional economic outlook, the IMF puts euro area growth at 0.2% in 2008, after 1.3% this year. The FT has an interview with Allesandro Leipold, acting director of the IMF’s European department, in which he says that the fall in credit growth would reduce inflationary pressure, and give the ECB more room for rate cuts.
Draghi fears credit crunch
Fears of a pending credit crunch were also raised by BoI governor Mario Draghi, who said in front of the finance committee of the Italian senate that the financial crisis is now turning into a credit crunch, pledging that the central bank will do everything to counteract that tendency. According to Corriere della Sera, Draghi also made the point that many banks do yet implement Basel II, prefering to stick with the old rule set, on the grounds that Basle I does not penalise them for holding off-balance sheet vehicles.
In another article the paper reports Silvio Berlusconi as saying that beyond Unicredit there are two or three other banks that need refinancing, for which they should tap the markets. The newspaper interpreted this statement as sign than another stage of Italian bank refinancing is imminent.
US launches money market bailout fund
We have been focusing on money markets freeze for a while, as is the one of the most important aspects of this crisis. The US yesterday made a huge step to stabilise money markets, by launchnig a fund that invests in short-term debt from money market mutual funds, to unfreeze this market. The FT has the details of how the scheme works. First, this fund is in addition to the TARP programme. The Fed will lend mony to five special purpose vehicles to purchase money market debt securities, including certificates of deposits, one of the most important instruments in the commercial paper market. Each of these SPVs may purchase paper from 10 financial institutions. The overall size of the programme is capped at $600bn. The Fed is funding 90%, and the funds are taking the first 10% of the losses. Meanwhile, money market rates continued to soften yesterday, with 3-month dollar Libor at 3.83%. 3-m Euribor fell a notch below 5% to 4.968%. The improvements are faster in the US than over here.
Sarko pushes for gouvernement economique
Nicholas Sarkozy, in a speech in front of the European Parliament, made a big push towards gouvernement economique, as a direct consequence of this crisis. It is interesting to see that this speech is the front page splash in Frankfurter Allgemeine Zeitung, and is hardly mentioned in the French this mornging (at least not at the paper we were looking at). Sarkozy went out of his way to underline the independence of the ECB, something to which the Germans react allergically. Merkel in particular seems to have develop the habit to reject everything the French president proposes, and it is no surprise that German politicians once more rejected Sarkozy’s proposal almost instantaneously. The German economics minister Michael Glos said the French proposal to protect European industry against takeovers from foreign sovereign wealth funds through protective government stakes runs counter to all the principles of our economic philosophy. (That is not entirely true, see for example, the Volkswagen, which does precisely that). Glos also said the state interventions in the banking sector should be regarded as an exception, not a rule.
Euro at $1.31
The euro goes down, the dollar strengthens. FT Deutschland reports that Stephen Jen, the currency strategist for Morgan Stanley, expects the euro to go down to $1.20, as bad news from eastern Europe is going to hit pan-European market sentiment. There is now an expecting of severe financial crises, and speculative attacks against the thouse euro outsiders with large current account deficits.
Bini-Smaghi blames Lehman failure for the crisis
The Wall Street Journal quotes Lorenzo Bini-Smaghi as saying that the failure of Lehman had a contagious effect, adding that it is legitimate to ask why its failure was not prevented. Bini-Smaghi says it is a democratically legitimate to let banks fail, but then asks the question: “...the question that needs to be asked is the following: Why do democratic decision-making processes lead to the wrong decisions being taken from the point of view of the common good?” He suggests one answer may be the growing inequality. “The emergence of stark inequalities entails the risk that decision-making mechanisms will be blocked, in particular in crisis situations, with negative repercussions for the collective good and social cohesion. It is a problem of rules, incentives and individual responsibility.”
Grand Coalition in dispute over stimulus
While the US is quickly heading for its second stimulus (and preparing for the third next year), the Germans want to priotise a balanced budget despite the credit-crunch. A sole voice of protest is economics minister Michael Glos, from the Bavaria CSU, who wants cuts in income taxes for lower wage earners, while finance minister Peer Steinbruck, SPD, says there is no room for manoeuvre. It look that, for the time being, Merkel is with Steinbruck on this. Frankfurter Allgemeine has more.
Berlusconi quotes Kant in defence of state aid
Frankfurter Allgemeine has an article hightlighting the European race for subsidies beyond banking with a focus on Italy. Tremonti is quoted as saying if banks get aid, why should other industry not also get aid. And Berlusconi said state-aid was a taboo until not long ago. Now the become a “categorical imperative.” Most of the aid programmes focus on Europe’s fast imploding car industry, including at EU level to insure at least some fig-leaf observance of European competition policy, which appears to be a victim of this crisis. The article also has example from Russia, China and Korea about subsidies.
How long will the crisis last?
Mervyn King gets very gloomy
According to the Times (hat tip Calculated Risk), Mervyn King is predicting a hard and very long economic downturn for the UK, adding that the economy has probably already entered into a recession, as there is a squezze on takehome pay, and a rising in living costs, and a decline in consuemr credit. King also made the points, according to a Bloomberg article, that the “age of innocence”, when banks lent each other unsecured for three months with only a small premium, will probably not return ever. King also said that foreign investor may be less willing to finance the UK current account deficit in the future, and this will necessitate a larger rise in domestic saving and weaker domestic spending in the short run.
Munchau: another two years
Writing in FT Deutschland, Wolfgang Munchau says that the interaction of a severe economic downturn and the credit markets, will ensure that this crisis may last another two years. Bankers like Josef Ackermann have made the habitual mistake of calling the end of the crisis on the grounds of a temporary lull. The crisis has a wave like nature, and the current, big wave, is now slowly petering out, but this should not be mistaken for an end of this crisis. It will take 18 months alone for the US property market to stabilise, and probably longer in Europe. The |US recession is likely to last throughout 2009, and this means a gradual rise in corporate and private defaults right into 2010. While stock markets usually anticipate an economic recovery well in advance, the credit market is a lagging behind the real economy.
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