Summits, summits, summits
The news over the weekend is that the agreement on a series of global summits to deal with the financial crisis. It is the outcome of a meeting this weekend by Nicolas Sarkozy, Jose Manuel Barroso and George Bush at Camp David. The Europeans lobbied heavily for this over the past weeks, securing the support from Japan, the current holder of the G8 presidency. EU president Nicolas Sarkozy promotes an ambitious reform of the actual financial system, a new Bretton Woods for the 21 century (Les Echos), but the US government is much more sceptical about the effectiveness of such a summit (see FT ). George Bush stressed that while regulatory and institutional changes were necessary, it was “essential that we preserve the foundations of democratic capitalism”. The EU is to hammer out an agenda proposal next week, reports the Frankfurter Allgemeine. The first summit will be hosted in the US and is expected to take place shortly after the US elections on November 4.
ING taps Dutch government for €10bn
The first big bank to lose its nerve and go cap in hand to the government is ING, the Dutch bank, which asked the Dutch government to recapitalise for a cost of 2% of GDP. According to NRC Handelsblad central bank governor Nout Wellink and finance minister Wouter Bos all insisted that ING was fundamentally sound, but that the global uncertainty made this desirable (we struggle to believe that a banking require €10bn from its government is solvent). Bos went out of his way to explain that ING could not be compared to Fortis which was on the brink of collapse. Wellink called it “proactive”. Under this plan, the Dutch government takes preference shares, with a dividend of 8.5%, and will quit as a shareholder as soon as the situation permits it.
German bank taps federal funds
The first German bank to ask for federal state help under the new scheme is BayernLB, a bank owned by the Bavarian state. It is funny in a way that the state owned banks are even desperate for recapitalisation than the private sector, and the state of Germany’s Landesbanken should be a sober reminder who anybody waxing lyrical about the benefits of state-owned banking. Frankfurter Allgemeine reports that the new capital injection will be in the order of €3-5bn. Commerzbank said it will consider a capital infusion, but has not made a decision, while Deutsche Bank said it won’t need it.
Some progress
Things are getting, which does not mean that the worst of this crisis is over, merely that we have passed the worst of the current wave of this crisis. Calculated Risk has a number of crisis indicators which have improved in the last few days (though they are still very troubling in absolute terms). Three-month treasury yield up from 0.4% to 0.79%, TED Spread down from 4.11 to 3.59%, two year swap spread, down from 138.38 to 122.2. There are also a couple of indicators where the trend is not so clear yet. But it is some progress.
Another trading scandal in France
The chairman and chief executive of Caisse d’Epargne, one of France’s most trusted savings banks, on Sunday night resigned after a lengthy board meeting, called to assess the consequences of the €600m unauthorised trading loss revealed last week reports the FT. The discovery has sparked a political outcry in France with even President Nicolas Sarkozy calling on management to shoulder the consequences. The sense of outrage is amplified by the bank’s reputation for safety. Almost one in two French savers trust their money to the bank best known as “The Squirrel”. On Sunday night Christine Lagarde, finance minister, said she was ”satisfied” with the board’s decision. The president Charles Milhaud is one of the first to go without any indemnity.
Munchau on the light at the end of the tunnel
In his FT column, Wolfgang Munchau disputes the claim that the worst of the financial crisis is behind us. What makes this crisis so toxis are the interactions between financial markets and real economy, which will be seeing soon. Property prices have a lot more to decline and will probably overshoot. Credit cards are next. Corporate defaults will go back up to double digits. The CDS market might implode. Emerging markets are imploding. Shipping is hit. What is needed is a more balance package, that recapitalises only a core part of the banking system, that brings the money market back to life quickly, that provides a stimulus for consumption, and some redistribution of income.
An alternative relief plan
Writing in Vox, Riccardo Cesari says current bailout plans do not address the roots of the crisis. It advocates a significant re-regulation of financial markets and assistance to households unable to manage their real estate debt. A mortgage relief plan would eliminate the cause for the crisis, would be less costly, would counteract the domino effect, and would be anticyclical.
Merkel favours a stimulus – but only for the car industry
This is the first time Germans experience Angela Merkel a recession, and a strange experience it is. Frankfurter Allgemeine has a report in which it says that Merkel’s CDU is now veering even further to the left. About a stimulus, the paper writes, Merkel favours a scheme for people to buy low-emission cars (which would be produced mostly outside of Germany) to serve the car industry. The paper quotes a CDU economic experts as criticising this plan is “irrational”. Quite.
Another “irrational” stimulus
When German governments plan a stimulus, it usually ends up as an increase in the structural deficit. The Grand Coalition now funds to make health care insurance tax deductible, which would amount to a small tax cut for many people, especially higher income earners, and singles. This package has no effect on the tax position for most families with children. The coalition calls this a “cyclically-adjusted growth policies”, according to Frankfurter Allgemeine.
Great timing from DSK
As if the International Monetary Fund had nothing better to do at a time when the global financial sector is on the verge of imploding. The IMF is now investigating, not so much whether Dominique Strauss-Kahn had an affair with a now departure Hungarian economist – which seems to be undisputed – but whether he abused his power. There are so far no indications that he did. The economics blog of Wall Street Journal, the newspaper that broke the story, has a useful collection of reactions from the French press, which speculated intensely over the weekend whether the revelation of the story by a right-wing US newspaper was intended destabilise DSK and to “harm French effort to coordinate a global response to the financial crisis.” Le Journal du Dimanche the appointment of DSK brought a seducer into puritan America. Le Figaro quotes French Socialist Jean-Marie Le Guen as saying he fears the story was a plot to destabilize DSK. Anne Sinclair, the wife, wrote on her blog that she and her husband were expecting the outcome of the IMF investigation “calmly and dispassionately.”
And Jean Quatremer tells us that he had known about this affair for eight months.
Budget talks
Ireland
Two of the Irish budget's most potentially unpopular measures - the medical cards and the income tax rise- are likely to be overhauled, writes the Irish Independent. The article goes on criticising the government and its inability to hang tough on other harsh proposals. The Cabinet would tomorrow discuss changes to the 1pc income levy. This follows lobbying from the trade unions and could possibly include exempting the low paid from the tax.
France
Dominique Seux in Les Echos writes that the budget talks, starting today in parliament, were never so surreal. Put together by the cabinet ahead of the financial crisis, this budget is completely out of line with the current circumstances. It still assumes a growth rate of 1%, which is double of the current consensus forecast. On the expenditure side, the only thing that is certain is that the deficit will be much larger than the figure indicated in the budget. Seux warns not to take up the pavlovian French instinct of an additional relaunch package. The deficit is relaunch already, any additional action would be understood as a cover up for more structural reforms and a burden for the future.
Monti on the crisis
Writing in Sunday’s Corriere della Sera, Mario Monti argues that the Europeans have reacted well to this crisis in a co-ordinated way. He makes the specific point that Europe was lucky to have a French presidency, and one of the big arguments in favour of the Lisbon Treaty is that it provides a permanent council, which could handle difficult situations much more consistently than six month presidencies.
Writing in today’s Corriere dells Sera, Angelo Panebianco makes the point that past predictions of a decline of the US all proved wrong, but the situation may be different this time. He predicts that the unipolar world could give way to an asymmetric multipolarity.
Sarkozy forever
Wolfgang Proissl, writing in FT Deutschland, provides an interesting snapshot on the French EU presidency, which started with the lowest expectations, and has developed into a great success. Barroso apparently wants Sarkozy to remain as head of the European Council forever, while people as diverse as Juncker and Rasmussen have all publicly admired Sarkozy’s handling of three crises – Georgia, Lisbon Treaty, and global finance – each one of which would have stretched most European leaders. Proissl also gives a sense of the horror felt by many officials at thought of a Czech presidency. Nobody sees how the Czechs could make any contribution to solving the Lisbon ratification deadlock.
Buiter on the neostructuralists
This is an interesting post from Willem Buiter, who writes about the neostructuralist theory of a credit crunch – according to which a credit crunch causes inflation to rise, as it hits supply more than it hits demand. Buiter is no fan of the “old” neo-structuralists, saying the analysis is half-right, and the policy recommendations always wrong. (The policy recommendations consists of trying to clamp down on this inflation through a rise in interest rates). He points to a number of modern fixes to this theory. In sum, Buiter agrees that inflation might temporarily rise, but that central banks should see through this reduction in disinflationary pressures, and not chase after this effect.
Spain – going down
Edward Hugh in Fistful of Euros has a very thorough, and very depressing, analysis on the Spanish economy, which according to his estimates is already in a full-blown recession that is likely to develop into a slump. Spain experienced a 7% decline in industrial output year on year. The manufacturing sector has shrunk at the fastest pace in 10 years in September, with output, employment and new orders all falling at 10-year record rates. The latest Markit purchasing managers index had Spain at 38.3, the worst ever reading for any country in the EU since the start of the index 10 years ago. Consumer confidence is also terrible. It all adds up, and it does not look good at all.
Edward Hugh also has a good – and a very long - second posting on the Spanish bank rescue package.
Hedge fund panic affects all parts of the markets
Naked Capitalism has an interesting entry about hedge fund panic, as well as a reference to a Financial Times article, about how panic sales among hedge funds has led to a fall in the price of gold, and now Japanese floating-rate government bonds, so called floaters, which are financial instruments that pay interest on the market yield of 10-year fixed-rate government bonds minus a spread. Some of these floaters are now trading below par value, which the FT says normally only happens in countries with high default risk.
Broadening the view on the crisis
For those who have the time: Le Monde has several pieces on the crisis, among them is a portrait of Nouriel Roubini as the Cassandra of Wall Street, a reprint of the last chapter of Galbraith’s famous book and an evaluation of the crisis by a sociologist and a philosopher.
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