German government bails out IKB with €1bn

 

The credit crisis has now reached the German taxpayer, as the government agreed to put up €1bn of a €1.5bn rescue package for IKB, one of the first European banks to be hit by the subprime crisis. Frankfurter Allgemeine reports that IKB had been on the brink of insolvency, and this new capital was essential to allow the bank to operate. The total amount of deposits at stake were €24bn. Finance minister Peer Steinbruck said that an insolvency would have caused untold damage to Germany's financial sector.

 

In a separate comment, the paper quotes Berthold Brecht's famous line unfavourably comparing bank managers with bank robbers. The commentators said there is no reason for state entities to own shares in private banks, and this was a classic case where a bank succeeded to privatise gains and socialise its losses.

 

 

Never one to mince his words, Willem Buiter weighs in with a devastating comment, saying that if any bank could be allowed to fail without any wider consequences it is IKB, one of the world's more insignificant banks. Germany's bailout sends a very troubling signal, and its effect will be to increase overall systemic instability. This bank got into difficulty not due to some external shocks, but due to its own mistakes. It deserves to fail.

 

 

There is also a similar debate in the US, the Calculated Risk blog reports. Credit Suisse Group made a proposal to expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.

 

 

 

 

European central banks do not move in line with Fed

Frankfurter Allgemeine says that European central banks are clearly not willing to follow the Fed, and instead continue to focus on inflation. While Jean-Claude Trichet appeared to open up the possibility of an interest rate reduction, he later emphasised continued concerns about inflation. The Swedish Riskbank yesterday actually increased the interest rate, while the Bank of England, in its latest inflation report, also indicated the very limited potential for interest rates cuts in view of the present inflationary trends.

 

The FT has an in-depth analysis of the Bank of England's statement, which has been getting distinctly gloomy. The report showed particular concern about an adverse feedback loop with low growth weighing down on asset prices, which in turn would lead to even tighter credit conditions.

 

 

2007 was another great bonus year for bankers

FT Alphaville reports the extraordinary news that bonuses for bankers have probably increased in 2007. Over a third of bank employees have received higher bonus payments than last year, while 70% said that payouts either matched or exceeded their expectations, according to a survey by headhunters Morgan McKinley.

 

 

iTraxx Watch

The iTraxx crossover is still trading at the extraordinary high level of 542bp (meaning its costs €542,000 to insure a portfolio of €10m in non-investment grade debt). FTAlphaville, which has a daily reports on the market for credit default swaps, has a detailed explanation by the head of credit strategy at UBS. It boils down deleveraging. As long as banks continue to liquidate the junk they have been sitting on, the market will not recover, and may even deteriorate further.

 

 

Irish mortgage lenders can sheer up

Charlie Weston in the Irish Independent argues that there is not only bad news from the global credit squeeze.  Without the financial turmoil, the ECB would have raised its interest rate by at least 1pp. Instead the ECB is now likely to cut rates by 0.5pp by the end of the year. There exists a highly competitive market for mortgage switchers. Ulster Bank said yesterday it was offering €2,000 to homeowners who transfer their homeloan and current account to it before the end of March. EBS and Halifax are among others who are also targeting the switcher market with offers of €1,000 towards the cost of your legal fees for changing mortgage provider. There is also a number of banks which have increased the interest rate they pay savers, despite ECB rates having been stuck at 4pc for ages now. Some providers for Motor insurances and credit cards also lowered their rates. So it is not all bad news…

 

 

Credit Crisis, next generation

The credit crisis has reached a part that was previously thought unassailable, the auction rate securities markets, which is heavily used by US municipalities, and backed by monoline insurers. The FT reports that the sudden collapse of this market has pushed interest rates as high as 20% on entities such as NY Port Authority. 

 

 

 

Why US rate cuts are not working

Yves Smith has a terrific entry in his Naked Capitalism blog, in which he refers to a Bloomberg story, which says that the Fed will have to cut its rates more. At issue is the fact US loan rates are not coming down despite the aggressive cuts in the Fed Funds rates. Bloomberg cites Stephen Cecchetti as saying that this means that the Fed will have to cut some more. But Smith makes the valid point that the reason why loan rates are not going down is the breakdown in securitisation. The Fed can cut as much as it likes, it will not affect loan rates, though it will drive up inflation.

 

 

 

Veltroni's promises

If you thought that Walter Veltroni, the new leader of Italy's centre-left, would mark a breath of fresh air, you should read Il sole 24 ore's front pager this morning. He promises an a extra allowance of €2500 per child, more money for the disabled, more money for women who take up jobs. He wants to lower taxes by, guess what, reducing tax evasion. And he wants to use the tesoretto - a tax receipt which according to the latest estimates is going to be non-existent this year - not for debt reduction, but to raise disposable incomes.

 

 

Belgian purchasing power loss fears ungrounded

Belgium is also one of those countries where the sentiment of a loss of purchasing power is out of sync with the statistics.  Le Soir quotes Guy Quaden, governor of the Banque nationale de Belgique, saying that between 2002 and 2005 when disposable income stagnated, there were fewer complaints about purchasing power than today. In 2006 and 2007, disposable income increased due to a tax reform and a fall in unemployment but Belgians are much more concerned about a loss of purchasing power than before.

 

 

Inflation watch

Kathemerini reports that the Greek inflation remained at 3.9% for the third month and is not expected to recede before the second half of the year. Finance minister Alogoskoufis has urged employers and unions to show restraint in their collective pay pact negotiations. According to sources, the government will announce at the end of the month its incomes policy for 2008, with pay raises of around 3%.

 

 

The impatient French

Why are the French impatient to see the results of a reform but are reluctant to allow its implementation? Jacques Kremer and Christian Gollier in Les Echos argue that the answer is partly psychological and partly political.  While it is always delicate to extrapolate from individual behavior, experiments found that people expect immediate satisfaction but postpone their duties. This individual tendency is reinforced by political tendency to promise more than could be done and the fact that reforms always cause redistribution between those who bear the costs and those who benefit most. The two authors suggest that the public discourse includes an explicit reference to the time needed for implementation and the diffusion if the beneficial effects. It would also help to impose rules that oblige us to act. 

 

 

Sarkozy's multiple failures

John Thornhill has a comment on Sarkozy in the FT, saying that Sarkozy is increasingly seen as one of them, not one of us. Three factors weigh down heavily on Sarkozy: The first is a realisation that he cannot deliver on his election campaign promise to increase purchasing power. The second is his hyperactivity. The third is his "baroque personal life", as Thornhill put it. He also notes that Sarkozy is already in a similar bind that his two predecessors were at the end of their second year in office.

 

El Pais has an even more devastating comment on Sarkozy, which concludes that he has taken France to the level of the principality of Monaco.

 

See also Wolfgang Munchau's latest blog entry on Sarkozy, focusing on the failure of his reforms.

 

---