What a week! In Hollywood terms it was a blockbuster:
- Drama-packed (Fortis, HRE, B&B, Glintnir but also HBOS, WaMu, Wachovia)
- Oh-so-many unexpected twists and turns (Congress passes bailout, House rejects it, Congress redrafts and passes it, House finally passes it)
- Superstars making cameo appearances (Warren Buffett, Wilbur Ross Jr, Bill Gross, GW Bush, Obama, McCain, Paulson, Bernanke, Sarkozy, Brown, Merkel, Berlusconi)*
- Comedy elements to relieve the tension (TV coverage of the House sessions on the bailout, tax-cuts on wooden arrows, puerto-rican rum and others)
- Critical acclaim by specialist and non-specialist publications & broadcasts (‘Fox and Hounds’*, ‘Taxicab Gazette’*, etc)
- An ending paving the way for a sequel (the closing scene, i.e. the close of the NYSE session, shows the Terminator’s* fingers -presumed killed- twitching and the red light coming back in its eye)
So, dear reader, now that the credit titles have rolled, the lights are on, the attendants clean-up pop-corn from between the seats, where do we go from here?
I am afraid to say that I see little evidence for jubilation just yet:
- The Libor has been bid only during the week and we need to see an offer on Monday
- O/N Libor, OIS- 3m Libor and TED spread are all at all time highs
- CP issuance has died a death in the last month, with a 10% drop in volumes, especially for financial paper
- Banks still refrain from lending to each other, and at the same time they are tapping the FED’s liquidity facilities like addicts, which is vary scary
- Corporates are facing significant debt refinancing requirements soon and unless the liquidity makes a come-back, there is no clear source for it (just to give you an idea, there is absolutely no appetite from Banks to lend medium/long term and for an investment grade corporate that tries to get a 60d financing the spread is close to an extortionate 600bps!); SMEs are particularly hard-hit, their Treasurers do conference calls to try to discuss their way out, but unless there is some divine intervention (government) things look tough. In fact, the EU ministers are discussing to pass an emergency fund to help the financing of local SMEs, as you read this.
- Another proof of the liquidity crunch manifests itself in the muni-bonds, with news that California may need USD 7bn from the Treasury if it remains unable to issue its revenue anticipation notes
- Evidence of contagion has been given (not that there ever was any doubt among practitioners, but it still shocked the public) in Europe with HRE, Fortis, B&B, Glintnir nationalized or on life support and many others in the emergency room. As I write this, I read that the German Banks that had agreed to lend HRE EUR 35bn are withdrawing the lifeline after the financial state of HRE has ‘deteriorated’ and liquidity fears persist. Some government sources talk of a bailout approaching EUR 100bn may be required. Iceland is being supported by the other Nordic central Banks to get out of its own problems, while the krona has lost 20% vs the EUR, offering a glimpse into an unwelcome, ugly but not altogether improbable future if the US has to keep pumping trillions to support the system
- The housing market (US, UK, you name it) doesn’t look great and consumer credit is scarce. There are folks reporting they can get no student loans, car loans, house refinancing, etc. although I believe that on average, credit is still available for those who have some decent history -albeit more expensive
Where do we go from here then?
You will recall from my earlier posts, that I believe that the specter of an inevitable recession is descending over the western economies. The credit/liquidity crunch and the systemic failure of the financial system that the world attempts to fix is like a sick bonus on top of that. Recession worries were raised before the news were dealing with the crunch. Goldman Sachs economists now predict a harder recession in the US with unemployment at 9%. The liquidity freeze will only make this worse; when corporates (small or large) cannot finance themselves, how will they invest in growth plans? If consumers have no credit and more crucially no confidence in the near future they won’t consume. That will bring more pain on corporates, leading to more layoffs and feeding this vicious cycle.
There are calls for a co-ordinated (global) big rate cut in base rates to boost confidence and ease the financing burden. Estimates are for 100bps in the USA and up to 150bps in the UK and EU. I hope these materialize sooner than later.
Governments rush to guarantee deposits to avoid a run on otherwise-solvent Banks that could bring these institutions down as well. Ireland has implemented an unlimited gtee, the UK has increased the limit from 35k to 50k, the FDIC has raised its limit to 250k and many economists and practitioners urge for these gtees to follow Ireland’s example and become unlimited. I have heard of many stories of people thinking to withdraw deposits from their Banks or actually going ahead and doing this. Hey, our poll last week showed that most of you believe ‘Gold. Bars. At home’ is the best investment strategy for now. This is very dangerous and exactly what is not needed right now.
A way to assure that any bailout support finds its way into the credit market needs to be established with the utmost urgency; that means re-establishing liquidity and re-opening the money markets & the credit market to corporates & consumers (hey, the interbank market as well). The absence of such a mechanism was one of the main criticisms of the US bailout plan. Let’s hope that there is fast action to this end! A recapitalization of the solvent banks is still required, along with gtees on how they will use the funds (i.e. lend). That would mean of course that first the insolvent ones need to be let go, so that would be painful indeed, but I am struggling to see an alternative.
Hedge Funds, PE et al
In the last weekly special, we mentioned that HFs are looking like the next domino piece to drop. No change here, at least not for the better. Redemption calls are high, money markets are on cardiac arrest, no credit is extended easily, the markets don’t help (especially with short bans and government intervention). I regrettably brace myself for a deluge..Hope I am wrong.
I am aware that I am approaching my word limit for this weekly so I will try to make it a bit more interactive and cheerful, after all this doom and gloom. You noticed that Snake Plissken, from the b-movie cult classic ‘Escape from New York‘ graces the weekly. The poll invites you, dear reader, to select the movie you think befits the current economic affairs better. The winning title will become next week’s cover. You can either select from the following or you are really fussy and a smart….s you can suggest your choice by comment. Vote from out main page.
What are you watching on your blu-ray (which you bought on credit) while the system folds?
- Wall Street (greed is not always good) (24%, 5 Votes)
- I don't have a blu-ray, it was repo'ed (24%, 5 Votes)
- The sound of music (weirdo) (19%, 4 Votes)
- Escape from New York (the original, it is just grainier) (14%, 3 Votes)
- Mad Max (the original, no Tina Turner dross) (10%, 2 Votes)
- Terminator (2, 'Judgement day' of course) (10%, 2 Votes)
- Armageddon (cliche but apt) (-1%, 0 Votes)
Total Voters: 21
* all similarities with existing publications, characters and persons is coincidental
