IMF to warn about $4 trillion write-offs

 

 

This is how toxic assets can grow during a depression. The first IMF estimate about the size of toxic assets in the global banking system, made a year ago, was $1 trillion. It was shocking number then. Then the IMF upped this forecast to $2.2 trillion. Now, according to the Times of London (hat tip Calculated Risk), there will be a new estimate of $4 trillion, of which $3.1 trillion are originated in the US, and the remaining trillion, almost, in Europe and Asia. These estimates keep on rising because the depression is now affecting the prices of some of the more liquid assets, and turning them toxic (so in solving the bankings crisis you are trying to pin down a moving target)

 

Deutsche Bank: US junk bond default rate to rise to 53%

If true, this forecast would have very serious implications for the financial sector, and could easily prolong our crisis signficantly. Bloomberg reports a Deutsche Bank projection that the default would rise above the level of the Great Depression, when it was “only” 45 per cent. The forecast assumes a recory rate of zero. Naked Capitalism makes the point that the latter was a pessimistic assumption, but the prevalence of so-called cov-light loans means that recovery is going to be more difficutl.

 

Kotlikoff and Sachs on Geithner-Summers: Even worse than you think

In an article in Martin Wolf’s economists forum Lawrence Kotlikoff and Jeffrey Sachs argue that the Geithner Summers plan is even worse that they had thought – because it allows banks to abuse it.  Sachs previous outlined that the plan is a massive transfer of wealth from the US taxpayer to Wall Street, as it encourages private investors to overbid. What they have now discovered is that banks can set up an off-balance sheet subsidiary that bids for the bank’s own toxic assets. The subsidiary would not profit, but the bank’s shareholders would get benefit that is directly proportional to the taxpayers’ money. So this is worse than the orginal TARP programme.

Paul Krugman, who is truly alarmed by this prospect calls this an insider deal, which amounts to a straight transfer of funds from the taxpayer to the shareholders.

 

 

Worse than the Great Depression

This is truly alarming stuff. Writing in Vox, Barry Eichengreen and Kevin O’Rourke take a look at industrial production, world trade and stocks markets and find that this recession, from a global perspective, is much worse than the Great Depression, at least so far. Most of the comparison are a US-centric only, and this suggests a milder development today (because the US is not as badly hit as other countries now, and it was worse hit than most countries then). Here are the two charts for industrial production and stock markets respectively.

 

 

Another striking picture

Brad Setser has produced the following chart, showing the collapse of global trade as well as global capital flows, which have collapse even faster. The latter is not the result of protectionism, he concludes, but of the financial crisis directly. He says the scale of the collapse is amazing.

 

 

 

Euro area’s policy establishment opposed to IMF’s proposal of fast-track euro entry

The reaction to the leaked IMF report about fast track euro entry by CEE countries were swift and predictable. The Europeans would rather spend hundreds of billions in firefighting balance of payment assistence than simply solving the problem. Jean-Claude Juncker says there are no short cuts for euro adoption. The ECB insisted that membership has rules, and these rules must be followed. The FT quotes analysts who say that this proposal is “not realistic”, and perhaps suited to small Baltic countries which already have fixed exchange rates.

 

 

 

Pisani-Ferry on the G20

Jean Pisani-Ferry has a fairly positive take on the G20 summit in London. Even though they did not solve the problem of the acute crisis, the G20 start a process of emerging global governance. He said the decision on international financial institutions were significant, in particular the $250bn increase in SDRs for the IMF, as this allows the IMF to deal far more effectively with capital outflows from emerging countries. He also welcomes the upgrading and extension of the Financial Stability Forum into a Financial Stability Board – which is another, albeit small step. He concludes that such decisions would have been regarded as unrealistic not too long ago, and they should be welcomed for that reason.

 

 

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