Next crisis wave on horizon as car bailout fails

 

The bankruptcy of at least one a large US car maker has come a nearer today, when the US Senate failed to reach a deal of a bridging loan to Detroit. In the talks got gridlocked over the wording of when the car makers had to repay the loans, and it is now up to Secretary Paulsen to use the TARP money for the car bailout. The US dollar dived against other currencies, and stock futures did not look good this morning.

 

The New York Times reports that the odds of that General Motors or Chrysler will be insolvent by the end of the year “are growing rapidly”. The company owe their suppliers $10bn for parts that have already been delivered. Many of the suppliers on the brink of bankruptcy themselves. The chain effect from this is also expect to hit Toyota and Honda, and other car makers. This is very serious indeed.

 

 

Stiglitz favours chapter 11 for car makers

Writing in the FT, Joseph Stiglitz says chapter 11 bankruptcy is the way to go for the US car industry. He said bailout would only only help shareholders and bondholders. Under chapter 11, the industry gets a chance to restructure. He concluded that we “need to think more carefully about who we are really bailing out and why.”

 

Meanwhile in Europe…

… EU leaders appeared to have agreed the proposed €200bn rescue package, and reports suggest that there will be a climate deal later today.

As for the rescue, the issue was ultimately uncontroversial, since everybody knows this is not really €200bn, as politicians have claimed, since there are now everything into the package to avoid passing a real stimulus. Germany now claims that its stimulus is made up of €32bn, which includes an accidental €7.5bn in savings on a commuter allowances which the Constitutional Court has asked the government to undo. See this article here from Frankfurter Allgemeine on how Germany arrives at this new figure. Some governments also put guarantees into the package. It seems the purpose of this exercise is not to provide a stimulus to the economy, but to dupe gullible journalists and political observers into thinking that something is being done.

 

Angela Merkel, the FT reports, also hinted that Germany may eventually raise its stimulus beyond the €12bn, the actual number Germany has so far committed to spending. But there were no details. Merkel has called for a domestic economic summit this Sunday, to lay the groundwork for a further discussion on a stimulus package.

 

The economic expectations in Germany deteriorated further. The Ifo economics institute yesterday topped the previous day’s gloomy forecast by RWI, predicting that the German economy would contract by 2.2% next year, and continue to contract in 2010.

 

In the UK, there was anxious debate about Peer Steinbruck’s rather stupid comments about the British economy. See for example, Paul Krugman’s note on the economic consequences of Herr Steinbruck. Oblivious of European issues, German newspapers only picked on the story because of what Krugman said. The pound yesterday fell to an all time low against the euro of Pounds 0.89 for €1, en route to parity.

 

The FT has a very nice story about the built-up of depression mentality among UK consumers. There are starting to buy products such as thermos flask (bad news for Starbucks), frozen foods (instead of ready made meals), and home hair-dye kits.

 

In Italy, Walter Veltroni, the leader of the opposition Democrats, launched a sharp attack on Berlusconi, saying the premier is not on the top of the situation, being sidetracked by his pet projects, such reforming the justice system, replacing newspaper editors, or his obsession with car vignettes, Corriere della Sera reports. He said Berlusconi is always fighting an election, even in the middle of a crisis.

 

In Spain, PM Jose Luis Zapatero rejected the recommendations of the IMF, which the previous day called for deep structural reforms to improve the economy’s productivity. He poured scorn on the IMF’s past forecasting record, and said the Spanish government had already enacted stimulus programmes that will get the country out of crisis, El Pais reports.

 

 
Don’t expect more rate cuts

We are not surprised by the statement of Jurgen Stark, since Jean-Claude Trichet last time refused to answer questions about the future monetary policy stance. Stark now confirmed that the ECB thinks it has done enough for the time being. There would be no new relevant data until February or March, which means that a January rate cut should be ruled out. Stark further indicated that future rate cuts would come in smaller steps, so we are looking at something like a 25bp cut in February. Stark also talked about risks for inflation – which we have not heard in a while. Switzerland, meanwhile, cut its repo target rate to a band of 0-1%.



 

China’s growth collapses

It takes time for official forecasts to adjust to reality, but this is now happening for Asia as well, where officials in governments, central banks, and international institutions are extraordinarily complacent in the way they confront the cricis. FT Deutschland reports that Goldman Sachs has revised the growth projection for China down to 6% - a level consistent with recession, given the growth of the industrial population – while another estimate assumes a growth rate of 5.5. The Asian Development Bank has also revised its forecast down to 8.5% - no doubt still lagging behind the curve. One of the shocking news this week was the collapse of Chinese exports.

 

Towards current account sustainability

Gian Maria Milesi-Ferretti argues in Vox that the current combination of a weak dollar and a large current account deficit is explained by long lags in the relation between US external accounts and the real effective exchange rate, high oil prices, and the "return differential” between US holdings of assets overseas and foreign holdings of US assets. A reduction of the US current account deficit could occur with no further dollar weakening. Even at current rates, the c/a deficit could still decline over the medium term, but the correction may be insufficient to prevent a further accumulation of US external liabilities relative to GDP.

 
 

Bank of America cuts 35000 jobs

Just an indication of how fast finance is shrinking. After the 50,000 job losses at Citibank, Bank of America announced 35,000 job cuts following the merger with Merrill Lynch.

 

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