Hedge funds caught by volatility
It was another bad day for the stock markets, with indices down some 5%, as the froth is coming out of the global equity markets. The money markets moved sideways yesterday, with no change in 3-month Euribor, a marginal deterioration of the TED-Spread. But the really worry news yesterday was volatility, which has now reached a level that hedge funds to be caught out unhedged. Two events yesterday were seen to accelerate, and perhaps trigger, the bloodbath of the hedge fund industry.
The unwinding of the carry trade
The carry trade now works the other way round. Positions are unwound, and the money is flowing back to Japan, where the currency rose from a level of some 165 yen per euro not too long ago, to something close to 115 yen. The FT says this is hugely dangerous, for the Japanese economy, but also for investors who do not get out in time, and calls for G7-level stabilisation.
VW – another GM
A few years ago, a raid by Kirk Kirkorian on GM caught short-selling hedge funds by surprise, and led to a veritble bloodbath. Yesterday, Porsche revealed it had, ooops, raised its stake in VW to some 74%. This shows us two things. The first that the German capital market is badly regulated in allowing such intransparent raids, a point made in an article in the FT. The second is that with a free float of only 5.8% of shares – the state of Lower Saxony owns 20% - this is going to be very tough for short-selling funds. The FT quotes the figures of 12.9% in VW shares, which were on loan to short-selling investors. As the share prices went up by some 140% yesterday, we should expect to hear some distress coming from the hedge fund industry soon.
Trichet back in pre-annoucing mode
Trichet yesterday preannounced a rate cut on Nov. 6, when the governing is likely but not certain to decide the rate cut formally. Trichet was speaking in Madrid. He said: ”Taking into account the recent decline in commodity prices together with the substantial weakening demand that has emerged lately, upside risks to price stability have diminished,”, while there are now more substantial risks to economic growth. Corriere della Sera, which leads the paper witht his story, speculates that the rate cut will be in the order of a half percentage points, a level the market now regard as a certainty. And the euro is down at $1.25.
Ifo tanks
All the numbers are essentially holding the same message. The latest Ifo index suggests that Germany may already be in a recession. The main index went down from 92.9 to 90.2, while the expectations components went down from 86.5% to 81.4%. These are the worst data since German unification, and suggest that this recession is going to be quite hard in comparision with the two previous pan-German recessions. FT Deutschland quotes an Ifo expert as saying that companies are still relatively optimistic in their assessment of their current situation. This would be the sixth post-war recession. In a separate article, the paper says the two factors behind the decline are the fall in demand for German export goods, and the credit squeeze.
State injects EUR 3.5 billion into KBC Group
The federal Belgian state is to lend € 3.5bn to the KBC Group. This state injection is considered necessary to prevent KBC from being in a disadvantaged competitive position and as an extra reserve against potential losses in Eastern Europe, the second home market to KBC, writes De Standaard. The state will receive bonds with a high coupon value (8.5%) for raising KBC’s capital from 8 to 10.7%. The state will have two managers at KBC with veto rights for particular dossiers.
The crisis from a French perspective
Dominique Seux in his Les Echos blog writes that on Friday October 24 the French realised that the crisis will hit them too. At that day Renault announced its production shutdown for two weeks, Peugeot Citroen a reduction by 30%, Air France issued a profit warning and the CAC lost 10%. We are facing the worst crisis after the Second World War. The good news is that so far the governments avoided the errors of the past. Their reaction was fast and most possibly the right one. In an interview with Les Echos Henri Guiano announced further measures if the crisis gets worse. Let’s hope that they find other solutions than those on 24 October 1929, when the Great Depression started.
Greek government under pressure
Prime minister Costas Karamanlis is considering holding snap elections next spring after one of the toughest weeks of his premiership. Karamanlis watched last week as his party took a battering during parliamentary debates on a property scandal and then had to accept the resignation of the government spokesman and one of his most trusted aides, Theodoros Roussopoulos. Karamanlis dismissed calls for a cabinet reshuffle, as the economic crisis would cancel out any boost. Instead he wants to work out a rescue package to be included in the budget which has to pass through parliament in December. Kathemerini writes that he might consider elections after March 15, and possibly at the beginning of May.
How to revive the securitisation market
John Kiff, Paul Mills and Carolyne Spackman from the IMF have an interesting article in Vox about how to revive securitisation after the fall in volumes since the start of the subprime crisis. As a result, banks are keeping more loans on their balance sheets and tightening lending standards. The authors review the factors that have led to this virtual market shutdown and suggest structural changes, in the form of simpler and more transparent products trading at wider spreads, will be required to revive securitisation.
Hungary’s leverage crisis
It is not that easy to summarize an Edward Hugh blog post, because they are long and very detailed. His latest entry on Hungary foreign currency mortgages is worth reading. The Hungarian government has just struck a deal with commercial banks to ease the pain of Hungarians, most of whom have a foreign currency mortgage, which has a fashion for the last decade, a fashion that has now abruptly stopped. He also provides some very useful references and summaries of literature on the balance sheet effects of excessive forex leverage.
How modern banking works
This is an instructive advertisement from Citibank in Germany, via Willem Buiter, who got it from Achim Duebel. It offers loans for 3.99% and deposits for 5.15%.
Italy’s fight against tax evasion
Corriere della Sera has a story on tax evasion, estimated in Italy to amount to €100bn, accounting for economic activity of some €280bn, or 20% of GDP. This levels is about twice the European average, and three times the level in the countries with the best record. But there has some progress in the fight against tax evasion. Last year, the authorities managed to trace €6.3bn, about 50% more than in previous years.
Is Jeffrey Sachs a central planner?
Jeffrey Sachs, writing in the FT, has produced a shopping list of things that need to be done to avert a global recession. First, Fed, ECB should extend swap lines to all main emerging markets. Second, IMF should extent low-conditionality loans to everybody, third, central banks should force their banks not to withdraw credit lines from overseas operations (example Spain vis-a-vis Latin America), forth, China, Japan and South Korea should undertake co-ordinated stimulus; fifth, Middle East should fund investment projects in emerging markets, sixth US and Europe should expand export credits for low and middle-income developing countries, and seventh, have a stimulus in Europe and the US. If this is what it would take to prevent the world falling into a depression, then surely Sachs is telling us that a depression is virtually unavoidalbe, since the world is not going to manage that degree of co-ordination.
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