mersenneforum.org - Global Financial Crisis (Was: Subprime Meltdown)

[QUOTE=xilman;144933]Yesterday some of the least diplomatic language I've ever heard came from government ministers acting in their official capacity.[/QUOTE]
Iceland is not the only European country reverting to a "European Union be damned - our very economic survival is at stake" [url=http://www.nytimes.com/2008/10/07/business/07euro.html]modus operandi[/url]. And the UK finance minister accusing another country of lack of sufficient pan-Europeanism would appear rather a "pot, meet kettle" thing to do. Iceland probably feels it owes little to to the Europeans at this point in terms of good will, having pleaded for a loan facility to help it weather the immediate crisis and been turned away - the fact that they turned to Russia is indicative of their resulting desperation.

The Europeans were also very quick to blame the U.S. for "causing the whole mess", when in fact numerous European nations were wallowing in the same kinds of reckless lending and speculative housing bubbles, just on a smaller absolute scale [but e.g. the debt leveraging was even greater in the UK, in a relative per-capita sense.] I note the European [i]schadenfreude[/i] at the U.S.' woes appears to have been short-lived.

---------------------------

[url=http://money.cnn.com/2008/10/08/technology/ibm.ap/index.htm]IBM beats estimates with early earnings[/url]: [i]Information technology company is on track for a 22% jump in earnings in 2008.[/url]

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=aw1xLFeVR9bo&refer=news]U.S. Entered a Recession as Record Consumption Boom Ended, Economists Say[/url]: [i]By almost all accounts, the U.S. is now in a recession, according to economists surveyed by Bloomberg News.[/i]

[b]My Comment:[/b] Tell us something we didn`t already know a year ago, geniuses.

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aCfBBqL4O9Xk&refer=news]Russian Farmers Curb Siberian Push as $10 Billion Debt Threatens Harvests[/url]: [i]The financial meltdown that started on Wall Street is now hurting farmers in Siberia, threatening a Russian agricultural revival that the United Nations says is needed to help avert a world food shortage.[/i]

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aAm0SVGQnyFU&refer=news]Libor Holds Central Banks Hostage as London Rate Freezes Worldwide Lending[/url]: [i]Danilo Coronacion oversees 15 percent of global coconut oil production at CIIF Oil Mills Group in the Philippines. These days, he spends a lot of time worrying about events half a world away in London. The name of his pain? Libor.[/i]
[quote]CIIF has more than $60 million of debt, or 70 percent of its working capital, linked to London interbank offered rates that have soared since Lehman Brothers Holdings Inc. collapsed on Sept. 15. The cost of borrowing in dollars for three-months in London jumped 23 basis points today to 4.75 percent, the highest level since December.
[b]
Rising Libor, set each day in the center of international finance, means higher payments on financial contracts valued at $360 trillion -- or $53,500 for each person worldwide -- including mortgages in Britain, student loans in the U.S. and the debt of companies like CIIF in Makati City, the Philippines.
[/b]
``You can't afford to be caught in the wrong position at any given time,'' said Coronacion, chief executive officer of CIIF, which generally pays 1 to 2 percentage points more than Libor.

Central banks from the U.S. to England and China cut interest rates yesterday in an attempt to restart the flow of credit and prevent a global recession. The moves came after they had funneled trillions of dollars into money markets in a failed bid to end the blockage. South Korea, Taiwan and Hong Kong lowered their benchmark rates today.

`Fear and Panic'

The process of setting Libor is overseen by the British Bankers' Association, putting it outside the domain of central bank policymakers. The overnight dollar rate fell 29 basis points to 5.09 percent. That's still 359 basis points more than the U.S. Federal Reserve's benchmark rate.

Libor, a gauge of bank funding costs, continued to rise even after Spain and the U.K. acted to strengthen their banking systems and the U.S. Congress approved a $700 billion financial bailout. Even the Fed's decision Monday to double emergency cash auctions failed to unlock short-term lending. The European Central Bank today offered banks as much cash as they need for six days at its benchmark rate of 3.75 percent, bringing forward new measures to soothe money markets.

``You get to a situation where fear and panic take hold,'' said Peter Dixon, a London-based economist at Commerzbank AG, Germany's second-biggest bank. ``This is the eye of the storm.''

...

Banks aren't lending because they're worried any borrower may become the next victim and they'll be left with losses as the credit freeze deepens.

Late on Oct. 7, as U.S. stock indexes tumbled to their biggest annual declines since 1937, AXA Investment Managers, a unit of Paris-based Axa SA, sent out an updated list of acceptable counterparties to about 50 of the firm's most senior investors and traders.

The memo, obtained by Bloomberg News, barred all new trading with Royal Bank of Scotland Group Plc and ABN Amro Holding NV, even if the dealings were backed by collateral.

Money managers were also told to look for ways of cutting credit risk. Trading was also suspended ``even on a collateralized basis'' with banks including Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., American Insurance Group Inc. and Macquarie Group Ltd.

Axa Investment Managers CEO Dominique Carrel-Billiard yesterday said the memo was out of date.

``At any given point in time, there are buy lists, sell lists, inclusion lists and exclusion lists,'' any one list will not tell you much, he said. ``In the current environment, those snapshots age at the speed of light.''

Former Bank of England policy maker Willem Buiter said one way to stimulate lending may be for governments to guarantee interbank lending or act as the universal counterparty between banks borrowing for longer than overnight.

``It's quite possible, indeed likely, that unsecured lending will not return on any significant scale -- ever,'' he wrote on his blog on Oct. 6.

Money-market rates signaled the severity of the credit crisis 14 months ago when Libor began to diverge from central bank policy rates. That happened after Paris-based BNP Paribas SA halted withdrawals from three investment funds because it couldn't value assets tainted by the collapsing U.S. subprime mortgage market.[/quote]
[b]My Comment:[/b] The fact that central banks have no direct influence on Libor is the #1 reason the $700 Billion financial bailout is doomed to fail. If the Fed wants to unfreeze the credit markets, intervening to backstop Libor-based lending would be a much more direct [and likely much cheaper] way to do it. Oh well, what's another Trillion bucks or so between friends?