Monday, October 06, 2008
Oh shit!
"We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars."
This is Ambrose Evans-Pritchard giving his take on the fast unravelling crisis in Germany. Mind you, The Times is not much more encouraging and Euronews is citing an IMF spokesman saying that the Eurozone is facing its first "trial by ordeal".
Clearly, the "colleagues" see the danger. The Independent is reporting: "EU leaders tear up rules of eurozone". The headline is misleading as it seems to apply to the whole of the EU. The story tells us that: "Public spending curbs and rules against state subsidies will be thrown – temporarily – out of the window to rescue European banks from the abyss of the global financial crisis."
The paper also tells us that this was decided at the Saturday "summit". But the four leaders can't do that. Furthermore, not even the commission can do it as these provisions are enshrined in the treaties. But, if they do decide to throw way the rule book, the game is over, The EU is on its way out. After all, if the rules are useless for a crisis, what use are they at all?
Meanwhile, we get from The Guardian a further taste of the ensuing chaos as British officials react furiously to Angela Merkel's announcement that Germany will guarantee all bank deposits.
They are pointing out that she had given no indication of the move over the weekend during the Paris summit. The Treasury is still trying to establish the implications of the German move. And, course, there is Neelie to deal with. Or is McCreevy going to have the last laugh, as they all go down the pan togather?
Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible. Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale. Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes. During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement. The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default. As the unflappable Warren Buffett puts it, the credit freeze is “sucking blood” out of the economy. “In my adult lifetime, I don’t think I’ve ever seen people as fearful,” he said. We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough. Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation. The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas. The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington. It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave. Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage. The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex. Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible. Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe. In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse. Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism. “We have to make sure Europe takes its responsibilities, like the US: action must be taken quickly and in a concerted manner,” said IMF chief Dominique Strauss-Kahn. As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt. “The US government has a technology, called a printing press,” said Fed chief Ben Bernanke in November 2002. (His helicopter speech). In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can “expand the menu of assets that it buys.” There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action. Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds. But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance. This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies. The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again. The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can. ================Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
Every country for itself as European unity collapses in an attack of jitters
Germany became the latest EU member to put its national interest first by announcing its own guarantee for bank deposits
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Oh man, I feel for you Europeans.
James McCullough, Manhattan, New York, United States of America
Guaranteeing savings appears fine by me but why not making clear that only existing savings are included? This would prevent money moving from one country to another and not destabilising neighbouring countries banks. Maybe I am just too simpleminded to understand.
Henry, Notts,
I believe that Chancellor Merkel has done the wise thing, all things to considered. I also believe that each EU state must protect itself in this fashion, and this will in effect provide a "Firewall" of sorts to isolate those specific economies which are in an unsalvageable position.
Peter Huffam, Winnipeg, Canada
So that's it.
The euro's days are now numbered. Not even one time, when the going got tough, could these guys pull together long enough to save the euro.
Zdarma Smith, Cambridge, UK
Financial Crisis Merkel assures Germans their savings are safe 05/10 20:40 CET
world
Germany is assuring its citizens that savers’ deposits are safe as another financial institution faces collapse.
The future of the country’s Hypo Real Estate hangs in the balance after a 35 billion euro rescue package was withdrawn.
But Chancellor Angela Merkel’s coalition says there are already guarantees for private savers within the German banking system totalling 568 billion euros.
Merkel said: “The federal governmet will not allow the problems of one single financial institution to become the problem of the whole financial sytem. Therefore urgent discussions are taking place to secure Hypo Real Estate. Furthermore we declare that those, who are responsible for these irresponsible actions, will be called to account.”
Not surprisingly, the financial crisis continues to dominate the newspaper headlines across Europe.
One insider described the Hypo discussions as “a round of poker.”
Angela Merkel has only just returned home from a meeting in Paris with the other EU members of the G8.
There, the decision by the Irish and Greek governments to announce a blanket guarantee of all bank deposits was criticised for threatening to destabilise the economies of other European countries.
The IMF says the Eurozone is facing its first “trial by ordeal”.
EU leaders tear up rules of eurozone
Monday, 6 October 2008
REUTERS
Italian Prime Minister Silvio Berlusconi, German Chancellor Angela Merkel, France's President Nicolas Sarkozy, British Prime Minister Gordon Brown and European Commission President Jose-Manuel Barroso
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Public spending curbs and rules against state subsidies will be thrown – temporarily – out of the window to rescue European banks from the abyss of the global financial crisis, EU leaders agreed at the weekend. Leaders of the four largest European Union economies – Britain, France, Germany and Italy – came up with no EU-wide magic formula, or rescue package, to defend the buckling European financial system.
They did agree, however, that national governments should be at liberty to take drastic action to shore up their own financial institutions, busting EU limits on national budgets and flouting European rules against public subsidies if necessary. Meeting in Paris, the Big Four insisted that national governments must "consult" their European partners before taking action which could harm rival banks in other countries. This was a rebuke to Ireland's decision last week to guarantee all bank savings for two years but also, implicitly, a recognition that other nations may have to take similar action.
But they accepted that the rules of the Stability and Growth Pact – the eurozone rules requiring that national budget deficits should be progressively reduced to zero – should be relaxed. This was a silver lining in the crisis for the French government. Even before the financial meltdown, Paris had been struggling to meet its commitment to balance its budget by 2012.
EU laws forbidding state subsidies to private companies would also be "applied in a flexible manner" (ie suspended), the summit decided. At France's insistence it was agreed that there should be "punishments", not golden parachutes, for the bosses of financial institutions which needed state bailouts.
The Big Four also called for urgent action to change EU accounting rules which are accused of deepening the crisis by encouraging stock-market speculation against banks.
The decision by the Big Four was portrayed by French officials as a significant lurch away from the free-market doctrine which has dominated EU economic policy for the past two decades.
French officials nevertheless claimed the summit as a victory for the can-do and interventionist instincts of the French President, Nicolas Sarkozy. The four leaders signed a declaration backing his plan for an emergency global economic summit next month to "rebuild the world's financial system". Previously, international reaction to this idea had been lukewarm at best.
The mini-summit also agreed a plan by Mr Brown to create a €12bn (£9.3bn) – and potentially €24bn – EU fund to aid small businesses.
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Treasury anger at German savings move
• UK under pressure to match guarantee
• Darling plan to take stake in banks
German chancellor Angela Merkel and finance minister Peer Steinbrueck give a statement to journalists in Berlin yesterday. Photograph: Rainer Jensen/AFP/Getty images
The Treasury was under pressure last night to guarantee the savings of all depositors in British banks after Germany announced it was following the lead of Ireland and Greece and offering a blanket guarantee on all savings - currently worth €568bn (£440bn). Late last night Denmark followed suit.
Britain had just agreed to raise its maximum level from £35,000 to £50,000, but may now need to take more radical steps to avoid a flight of savings.
British officials were furious with the German chancellor, Angela Merkel. They said she gave no indication of the move at a summit in Paris on Saturday designed to coordinate a European response to the economic crisis. The Treasury was last night trying to establish the implications of the German move.
Speaking of the decision by the Greek and Irish governments to offer blanket guarantees, the new business secretary, Peter Mandelson, said yesterday: "It would be better while operating on a country by country basis, we did so in a coordinated way and we brought a collective European view. We are all interlocked. We are in this together."
Denmark later guaranteed all bank deposits as part of a deal with banks to set up a £3.6bn liquidation fund.
The German move came as the Treasury was preparing a contingency plan to take a stake in failing British banks to recapitalise them. This gained the support of the Conservatives and Liberal Democrats yesterday.
Today the chancellor, Alistair Darling, is due to make his first Commons statement on the credit crunch since the financial turmoil exploded on the markets, but he is not expected to make any major policy statements or announce support for recapitalisation with taxpayers' money.
However, he hinted that ministers were looking at more dramatic options when he told BBC 1's Andrew Marr Show he was "looking at a whole range of proposals ... and that means looking at some pretty big steps that you would not take in ordinary times, but we are ready to take them".
Mandelson said every option, including recapitalisation to take a non-controlling stake in a bank rather than a government takeover, would have to be considered.
In a significant shift in position, the Tory leader, David Cameron, said he favoured a recapitalisation to strengthen the banking system. "It is something parties should talk about, and I think it is something where consensus would be better than opposition." Previously the Tories had spoken of ailing banks being taken over by the Bank of England to run them down and sell off their profitable assets.
The shadow chancellor, George Osborne, said yesterday that the government might need to follow the lead of Sweden in the 1990s and buy stakes in a host of banks to shore up their finances. "The ad-hoc approach is coming to an end and we need to look at much bigger solutions," he said. "We stand here willing to talk to the government about this. Gordon Brown's approach - which is 'look, I'm going to deal with this on a case by case basis' - is running out of road."
Cameron added: "The problem at the moment is that the banks are not lending to one another, the Bank of England is meant to be the lender of the last resort. There is a danger of it becoming the lender of the only resort. There is only one thing worse than state aid for the banks, and that is doing nothing."
Darling has already allowed the Bank to put £40bn into the market this week to ease the problems of banks accessing money, but there are increasing signs that this is dealing merely with the symptoms of the problem.
The chancellor also gave a broad hint that he feels the Bank of England is free to cut interest rates on Thursday when he said its remit was not confined to controlling inflation. "The Bank of England also has a wider duty to support the government's economic objectives," he said.
He did, however, reject calls from the Liberal Democrat treasury spokesman, Vince Cable, to specifically change the Bank's remit, saying such a move would undermine its independence. Cable had warned: "We are in a real crisis situation. In an edge of the cliff environment."
Darling is due today to publish his banking reform bill and jointly chair the first meeting of the new national economic council. The bill will contain measures on guaranteeing depositors' savings, and follows talks with Conservatives and Liberal Democrats.
On Wednesday, in the Mais lecture, Darling is expected to drop a broad hint that the scale of government borrowing, in part induced by the financial crisis, means he will be unable to meet the government's so-called sustainable investment rule.
The rule laid out by Brown when chancellor in 1997 sets out that borrowing must be strictly limited to ensure that Britain's total public sector debt never exceeds 40%of national income.
Without setting out entirely new rules on borrowing and investment, Darling said he would set out in his talk his thoughts on what the new rules should be