As I've said a number of times in other entries on this blog, equity holders of banks have a responsibility to take the hit they deserve for the lack of intervention into the standards corporate governance exhibited by the executive boards of the vast majority of banks in various parts of the western world. As part-owners, they had the responsibility to voice their misgivings, pressurise the executive board or, at the very least, sell their shares if they didn't agree with the strategy or direction. If they did none of the above, they should shoulder the burden and feel the pain that their falling share price brings. This stance I maintain, and reiterate, to a certain point. Also, I realise now, this stance is based upon a certain assumption that the equity market understands why stock prices are falling fast and the potential circumstances in which a banks solvency can be stabilised and the potential for future profitability revived. I now fear this is not the case.
The current panic in most European banks stocks is predicated upon a lack of confidence in the short-term money markets, where financial institutions extend and take short-term cash funding to facilitate the day-to-day operations of the bank. It is based upon the obvious circumstance that some banks can find themselves with more money than they need at the end of any business day, and other with not enough. However it has also expanded into a market that banks have come to rely upon for short-term funding of their operations into which funds with a specific investment strategy to lend money for short periods and (usually) a small yield over Libor. Over the years, banks came to invest some of their cash into these funds in order to support its expansion so that it would (theoretically) become a very liquid and easy source of cash. The problem we are now realising is that it is completely predicated upon the assumption of complete faith in the borrowers over very short periods. which has now broken down.
The astronomic increase in the yield above Libor that some of these institutions are having to pay in order to get short-term cash is easily explained by the increased risk of their default in the near-term. The increased cost of this funding is obviously crippling for the profit margin of the banks and, in most cases, results in a day-to-day running loss from the operations.
The Irish Government's extension of a full guarantee of Irish bank debts and deposits resulted in a dramatic reduction in this overhead and, the UK government's extension of a blanket £250bn guarantee of short-term bank lending has also had a similar effect. So, this solves one problem, and stabilises the ship so that the clean-up can begin. The cost of clean-up will obviously have to be footed by the bank's shareholders however, what is the extent of the clean-up...? This is less clear.
The expected pain for bank shareholders has happened and, in my opinion, gone way too far. The lack of understanding of basic finance fundamentals by many within the equity markets has become a field day for the equity market speculators who have begun taking advantage of the lifting of the short-selling ban. The lack of leadership within the equity market investment community, and to a large extent, the pain already felt, has given the short-sellers free reign to push the equity markets down as no one is prepared to stand up and lift the banks out of the range of their ugly sticks. In the land of the blind, the man with one eye is king... Or, even the man who claims to have one eye.
The big problem with the extent of this sell-off is that it erodes the capitalisation ratios of the banks. This is the basic concept of owner equity vs debt in the company. A bit like the deposit vs debt ratio of your house and its mortgage. If the house is reducing in value, this erodes the equity you have in the house. For banks, the regulators require them to have a certain amount of equity at all times in the operation. So, if the stock price continues to erode, the capitalisation of the bank begins to come under threat. We have gone well past this stage on a lot of the bank stocks in Europe.
The short-sellers are banking upon the fear, of the regular equity investor, that these mortgages and leveraged loans, that occupy the most toxic positions on the balance sheets, will leave a huge hole once they are sold, come to refinance, or default. Within the UK and Ireland, the main worry is buy-to-let mortgages, non-conforming mortgages and, loans to property developers. These are now looking very risky and will probably end up costing a pretty penny in write downs but, the option value in owning the stock of the company with regards to future potential profits once the cycle turns again seems to have been completely forgotten. Also, there is the effect of overly negative opinions of conditions of the various bank balance sheets, versus some positive comparison for others. Sometimes these can be very polarised and a tad out of whack. But, perception is the key.
Take Goldman Sachs as a good example. Last year they rolled out their star-trader of the year as a mortgage trader called, Michael Swenson, who apparently was allowed to amass a short position (negative to the direction of the US mortgage market) so large that it contributed $4bn in profits to the Goldman record bottom line in 2007. At the same time, they were gathering an ever-increasing collection of illiquid assets that reached, in August of this year, $68bn in value. These assets occupy a space in the bank's balance sheet that is called the Level 3. This group of assets are deemed to be so illiquid that the bank is allowed to mark their value to an internal model and simply declare the value to the market with only cursory details as to the type of exposure they represent. So, was this short position an inspired punt or, was it simply a hedge for the toxic skeletons in the Goldman closet that is Level 3...?
For a long time, the exemplary reputation that Goldman enjoy held investors' confidence. Only in the last couple of months has the pandemic fear spread to their good selves. While Morgan Stanley scurried to find an equity investor and finally leaped at Mitsubishi UFJ, Goldman Sachs were playing it cool and talking to Warren Buffet. Buffet has been widely chronicled to have always craved to acceptance and acknowledgement of Wall Street. Especially, its golden boy, Goldman Sachs. It is quite possible that during negotiations Goldman, knowing Buffet's aversion to highly complicated financial risk, declined to show their balance sheet and made Warren realise that such was his reputation and theirs, that his investment of $5bn in their equity would be a self fulfilling prophesy in itself. No one would ever again doubt the financial nous of Goldman Sachs and they could side-step the worst of the financial meltdown.
Such is the decline in some of the European banks' stock prices that, there now exists a massive opportunity to take control of the future of European banking. However, in the midst of the blind panic, it would take a suicidal maniac to just invest in the stock. The only solution is to take the banks out of harms reach and off the stock market. So the short-selling speculators can no longer profit from the confusion.
The current market capitalisation of Bank of Ireland is about €2bn, and that of Allied Irish bank is about €2.5bn. The Irish government has kept their powder dry and now is the time to pounce. Take them private and nationalise them so they can be recapitalised in safe distance from the madness that has encapsulated the equity markets. Those equity lads simply haven't a clue what's going on.
WNgC
Monday, 13 October 2008
Thursday, 9 October 2008
Checking the wrong guage...
Right, so Hank's got his TARP(aulson) and Brown has nationalised UK banking Inc. The EU is guaranteeing banking deposits up to anything from €50k to €100, depending on the member state, and Ireland is extending the bank guarantee to the Irish operations of foreign owned banks. What happens next and how do we know if its working...? Lets look at the various measures of performance that could tell us.
Recently, mainstream media discovered a prime candidate for the role of Lee Harvey Oswold for this credit crisis. Strange and shady financial derivatives called credit default swaps (CDS), which are essentially bilateral financial contracts between two parties who beg to differ with regard to the creditworthiness of a specific corporate entity, have been dragged into the streets like a heretic in midst of the spanish inquisition. A credit default swap is expressed as the exchange (or swap) of a fixed rate (like an insurance premium) in exchange for a floating future payment (the makewhole difference between the recovery value of a company's loan or bond and its original value). Basically, its an insurance policy on the loan or bond of a company, in the event of its bankruptcy, for which the buyer pays a premium. This premium is considered an expression of the probability of the company going bankrupt - the higher the premium, the higher the likelihood of bankruptcy. The index of European financial CDS premiums (iTraxx Financial) first peaked at the end of July, last year, 6 weeks before the northern rock crisis made the UK even consider the possibility of a bank failure. The CDS market is a liquid and efficient measure of corporate credit worthiness and is a far more effective and informed indicator than the equity markets. CDS has been pilloried in the press as the root of all evil when, in fact, the source of much of the global bank balance sheet toxicity was actually the off-balance sheet structures that used CDS to take exposure to portfolios of corporate entities. These off-balance sheet structures are the result of teams of financiers and lawyers in banks finding structural loopholes in global company law and accounting practices, in order to further maximise its leverage - thus magnifying the exposure to extraordinary levels. The lax nature of regulatory oversight is the root of this issue, not CDS. Credit Default Swaps are in fact a reliable early warning device and a much more informed and reliable indicator of corporate health than the equity markets. The shell-company, off-balance-sheet structures that exploited their liquidity are the tragic result of a financial industry driven to ever-increasing lengths to generate respectable returns from ever-decreasingly yielding assets. As the bull market drives prices up, their yield diminishes.
Its already well established that the equity market completely failed to recognise this credit crisis on the horizon. Most equity analysts have acknowledged their complete ignorance as to the complicated nature of the various off-balance sheet vehicles operated by the banking industry and the structured assets that were contained therein. Yet, the entire mainstream media continues to focus obsessively on the Dow Jones and FTSE indices without considering what it is actually a measure of. Equity prices are, simplistically perhaps, a measure of expected future cashflows (dividends) of a company and as such, are a consensus prediction of how big a difference a company can generate between the cost of its inputs (overheads) and the price it can get for its finished product. For the banking industry, the finished product is basically the rate of interest it can get for extending credit and its main overhead is the rate at which it can borrow money (fund itself). This current crisis has been caused by the inability of banks to source funding at a low enough cost to remain solvent. The main source of this funding is the money markets, which is a very large open market for borrowing money and extending credit over a short term (typically 1 day to 3 months). This market relies on the ability of those extending credit to treat all those seeking funding with complete trust. The toxicity of global banking balance sheets has meant that most participants with funds to extend are reluctant to loan to anyone. This has caused the global money markets to effectively grind to a halt and make most banks and financial institutions to hoard cash, rather than loan it out - UBS are rumoured to be hoarding €1 trillion of cash that they are not offering into the money markets. This results in everyone chasing a smaller amount of cash, and those anything less than 100% kosher paying through the nose for even the shortest term of loan.
The day before the Irish government announced the banking guarantee, Anglo Irish Bank were sourcing funds in the money markets at an astonishing rate of 5.5% above euribor. To put this in perspective, most current tracker mortgages in Ireland are charged a rate of between 0.5% and 1% above euribor. It doesn't take a genius to see the problem there. The first thing Hank Paulson did when he got the first block of funds from the US treasury was to buy large swathes of commercial paper (short term loans) in the money markets, in order to push the cost of funding down. In Ireland, banks were immediately funding at greatly reduced rates in the money markets after the announcement of the government guarantee. These developments have had the initial benefit of ensuring the banks ability to continue operating in a solvent manner. There are many other steps for them to take before the rehabilitation is concluded. Toxic assets must be sold off by the banks, and the amount of leverage the banks utilise needs to be reduced by a comprehensive recapitalisation of their balance sheets. Only then can they look to start generating profits again. This process will cost money, which the banks will have to pay, and therefore, this will impact their bottom line profits. Given that, the equity market can expect very little in the way of dividends for the next few years from banks.
Bank stocks are weighted heavily within the FTSE 100 and so, comprise a large proportion of its value. If banks are not likely to make much profit for the foreseeable next few years, this index is bound to suffer badly regardless of the success of the bailout plans and so, is a completely irrelevant indicator as to the fortunes of the financial industry's rehabilitation. The focus by media on the FTSE is merely confusing the matter and telling us very little. We got into this mess because of the lack of attention paid towards the basic principles of finance and the credit market in particular. We will only know if we can repair the damage by monitoring the money and credit markets. The equity market tells us nothing useful at the moment - let's stop working ourselves into a tizzy by its inevitable decline.
WNgC
Recently, mainstream media discovered a prime candidate for the role of Lee Harvey Oswold for this credit crisis. Strange and shady financial derivatives called credit default swaps (CDS), which are essentially bilateral financial contracts between two parties who beg to differ with regard to the creditworthiness of a specific corporate entity, have been dragged into the streets like a heretic in midst of the spanish inquisition. A credit default swap is expressed as the exchange (or swap) of a fixed rate (like an insurance premium) in exchange for a floating future payment (the makewhole difference between the recovery value of a company's loan or bond and its original value). Basically, its an insurance policy on the loan or bond of a company, in the event of its bankruptcy, for which the buyer pays a premium. This premium is considered an expression of the probability of the company going bankrupt - the higher the premium, the higher the likelihood of bankruptcy. The index of European financial CDS premiums (iTraxx Financial) first peaked at the end of July, last year, 6 weeks before the northern rock crisis made the UK even consider the possibility of a bank failure. The CDS market is a liquid and efficient measure of corporate credit worthiness and is a far more effective and informed indicator than the equity markets. CDS has been pilloried in the press as the root of all evil when, in fact, the source of much of the global bank balance sheet toxicity was actually the off-balance sheet structures that used CDS to take exposure to portfolios of corporate entities. These off-balance sheet structures are the result of teams of financiers and lawyers in banks finding structural loopholes in global company law and accounting practices, in order to further maximise its leverage - thus magnifying the exposure to extraordinary levels. The lax nature of regulatory oversight is the root of this issue, not CDS. Credit Default Swaps are in fact a reliable early warning device and a much more informed and reliable indicator of corporate health than the equity markets. The shell-company, off-balance-sheet structures that exploited their liquidity are the tragic result of a financial industry driven to ever-increasing lengths to generate respectable returns from ever-decreasingly yielding assets. As the bull market drives prices up, their yield diminishes.
Its already well established that the equity market completely failed to recognise this credit crisis on the horizon. Most equity analysts have acknowledged their complete ignorance as to the complicated nature of the various off-balance sheet vehicles operated by the banking industry and the structured assets that were contained therein. Yet, the entire mainstream media continues to focus obsessively on the Dow Jones and FTSE indices without considering what it is actually a measure of. Equity prices are, simplistically perhaps, a measure of expected future cashflows (dividends) of a company and as such, are a consensus prediction of how big a difference a company can generate between the cost of its inputs (overheads) and the price it can get for its finished product. For the banking industry, the finished product is basically the rate of interest it can get for extending credit and its main overhead is the rate at which it can borrow money (fund itself). This current crisis has been caused by the inability of banks to source funding at a low enough cost to remain solvent. The main source of this funding is the money markets, which is a very large open market for borrowing money and extending credit over a short term (typically 1 day to 3 months). This market relies on the ability of those extending credit to treat all those seeking funding with complete trust. The toxicity of global banking balance sheets has meant that most participants with funds to extend are reluctant to loan to anyone. This has caused the global money markets to effectively grind to a halt and make most banks and financial institutions to hoard cash, rather than loan it out - UBS are rumoured to be hoarding €1 trillion of cash that they are not offering into the money markets. This results in everyone chasing a smaller amount of cash, and those anything less than 100% kosher paying through the nose for even the shortest term of loan.
The day before the Irish government announced the banking guarantee, Anglo Irish Bank were sourcing funds in the money markets at an astonishing rate of 5.5% above euribor. To put this in perspective, most current tracker mortgages in Ireland are charged a rate of between 0.5% and 1% above euribor. It doesn't take a genius to see the problem there. The first thing Hank Paulson did when he got the first block of funds from the US treasury was to buy large swathes of commercial paper (short term loans) in the money markets, in order to push the cost of funding down. In Ireland, banks were immediately funding at greatly reduced rates in the money markets after the announcement of the government guarantee. These developments have had the initial benefit of ensuring the banks ability to continue operating in a solvent manner. There are many other steps for them to take before the rehabilitation is concluded. Toxic assets must be sold off by the banks, and the amount of leverage the banks utilise needs to be reduced by a comprehensive recapitalisation of their balance sheets. Only then can they look to start generating profits again. This process will cost money, which the banks will have to pay, and therefore, this will impact their bottom line profits. Given that, the equity market can expect very little in the way of dividends for the next few years from banks.
Bank stocks are weighted heavily within the FTSE 100 and so, comprise a large proportion of its value. If banks are not likely to make much profit for the foreseeable next few years, this index is bound to suffer badly regardless of the success of the bailout plans and so, is a completely irrelevant indicator as to the fortunes of the financial industry's rehabilitation. The focus by media on the FTSE is merely confusing the matter and telling us very little. We got into this mess because of the lack of attention paid towards the basic principles of finance and the credit market in particular. We will only know if we can repair the damage by monitoring the money and credit markets. The equity market tells us nothing useful at the moment - let's stop working ourselves into a tizzy by its inevitable decline.
WNgC
Wednesday, 8 October 2008
Investment, ownership & responsibility
As I have written about in previous posts (http://waldorfswords.blogspot.com/2008/09/accountability-and-responsibility.html), the ownership of ordinary stock in a publicly listed company is not simply a silent investment. Investment in the stock, or equity, of a PLC intrinsicly represents a partial ownership of the company and so, a responsibility to direct the stewardship and management of the company in a profitable direction that also sits easy with their own moral and philosophical ideals. The idea that equity owners can complain about poor management and stewardship of a company after it falls to its knees is, frankly, obnoxious. If you don't understand what a company does, don't buy its stock. If you don't understand the strategy of a company's executive board, don't buy the stock. If you own stock and don't agree with the way its executives are running the company, sell the stock. Buying or holding the stock of a company, implicitly suggests that you agree with the executive board's strategy and completely understand what the company does. If you then find the company goes bankrupt, you have no one else to moan to, except yourself.
The various steps taken by the fiscal policy makers in the major economic regions around the world to enact their respective strategies have been notable by their subtle differences of substance and delivery. Smaller countries like Ireland, Spain, and Greece, have managed to swiftly exceed expectations and so, relieve a lot of panic and doubt. Larger countries like the US and the UK have obviously taken slightly longer however, the basic level of leadership across these countries has varied greatly.
Brian Cowen and, in the shadows, Charlie McCreevy, have probably shown themselves to be the boldest and bravest by announcing a full and unconditional government guarantee of indiginous Irish banks' deposits and dated debt. Hank Paulson has constructed an insightful solution to restoring mutual confidence amongst US banks by creating a garbage truck for the toxic assets that are currently taining US bank balance sheets. However, he has been held back by a congress, led by Nancy Pelosi, which failed to recognise its responsibility to make difficult decisions that are in the best interests of the country at large however negatively it may affect their immediate popularity. The delay in mobilising this bailout has caused it to become a disappointment for the markets. This delay and expectation mis-management has been overshadowed however, by Gordon Brown's procrastination over the UK solution. The agonising wait, inevitable leak, and subsequent delay of the UK bank bailout would never result in anything but disappointment. Wednesday's luke warm reaction to Brown's plan was as predictable as it was painful. It was even less surprising that it needed a follow-up global rate-cut extravaganza to steady the ship.
Various parts of the media have hailed the UK solution as Brown's finest moment and, there is no doubt that it is nothing if not bold and ambitious. However, the main objective of the plan has been flagged by both Darling and Brown as a recapitalisation of the UK banks' balance sheets as well as the re-establishment of confidence in their participation in money market activities for all other participants so that, they can revert to funding their operations at previous competitive levels. These goals may well end up being achieved but, a fundamental aspect of this plan completely undermines the first objective of this plan. By sliding in at preference share level in seniority on the UK banks' balance sheets, the UK government have given themselves first call on any potential dividends and, on the total assets in general. The fundamental concept of a company's equity price is as an expression of expected future cash flows, or dividends. If any potential dividends are hoovered up by preference shareholders (eg UK govt) first, this massively devalues the ordinary stock. Slotting themselves in at preference share level on the UK banks' balance sheet has effectively eliminated any motivation for the average investor to be an ordinary stockholder of these companies and so, diminished their ability to raise anymore equity capital. Which, in turn, reduces their ability to recapitalise.
By simply blanket guaranteeing its indigenous banks' debt and deposits, the Irish government has immediately stabilised the Irish banks' credit worthiness and so, unlocked a staggering amount of funding from third parties within the money markets (and outside Ireland) while, still retaining the option to invest the taxpayers' hard cash in their equity. They have yet to write a cheque to any of the banks while Gordon has already committed over £75bn of taxpayers money. The Irish guarantee has ensured that foreign money has flocked to fund the Irish banking system while, Gordon has already committed the UK taxpayer to massive equity interests in the UK banking sector. The former has successfully manipulated global capital markets while the latter has regressed UK society back to socialist fundamentals of the pre-Thatcher government.
Meanwhile, on mainland Europe, German industrial production rises by 3.4% in September from the previous year and France continues to tow the europhile party-line. Merkel and Sarkozy continue to blame blase Anglo-US attitudes to leverage while Trichet seemed hellbent on ignoring everything expect soon-to-be-extinct inflation. The thinly veiled strategy of tailoring European fiscal policy to suit the German economy has backfired spectacularly. Trichet's merciless insistence to ignore the faltering Irish, Spanish, Italian, and Greek economies by maintaining European base rates at 4.75% has completely eliminated any credibility he may have ever enjoyed. Today's rate cut, in tandem with the Fed, BOE and others can only have been agreed to under duress from someone like Bernanke. Ridiculously removed from reality perhaps but, Mervyn King has managed to say nothing on behalf of the BOE to the market over the past two weeks. Outstanding!
Bottom line is that Europe and the UK, has found itself seriously lacking in the leadership department. A slightly flawed but, well meaning, and speedy, effort will outperform a slightly flawed, poorly executed and delayed plan every time. Expectation management is the key to effective fiscal policy formulation. Disappoint and you will be sunk.
WnG
The various steps taken by the fiscal policy makers in the major economic regions around the world to enact their respective strategies have been notable by their subtle differences of substance and delivery. Smaller countries like Ireland, Spain, and Greece, have managed to swiftly exceed expectations and so, relieve a lot of panic and doubt. Larger countries like the US and the UK have obviously taken slightly longer however, the basic level of leadership across these countries has varied greatly.
Brian Cowen and, in the shadows, Charlie McCreevy, have probably shown themselves to be the boldest and bravest by announcing a full and unconditional government guarantee of indiginous Irish banks' deposits and dated debt. Hank Paulson has constructed an insightful solution to restoring mutual confidence amongst US banks by creating a garbage truck for the toxic assets that are currently taining US bank balance sheets. However, he has been held back by a congress, led by Nancy Pelosi, which failed to recognise its responsibility to make difficult decisions that are in the best interests of the country at large however negatively it may affect their immediate popularity. The delay in mobilising this bailout has caused it to become a disappointment for the markets. This delay and expectation mis-management has been overshadowed however, by Gordon Brown's procrastination over the UK solution. The agonising wait, inevitable leak, and subsequent delay of the UK bank bailout would never result in anything but disappointment. Wednesday's luke warm reaction to Brown's plan was as predictable as it was painful. It was even less surprising that it needed a follow-up global rate-cut extravaganza to steady the ship.
Various parts of the media have hailed the UK solution as Brown's finest moment and, there is no doubt that it is nothing if not bold and ambitious. However, the main objective of the plan has been flagged by both Darling and Brown as a recapitalisation of the UK banks' balance sheets as well as the re-establishment of confidence in their participation in money market activities for all other participants so that, they can revert to funding their operations at previous competitive levels. These goals may well end up being achieved but, a fundamental aspect of this plan completely undermines the first objective of this plan. By sliding in at preference share level in seniority on the UK banks' balance sheets, the UK government have given themselves first call on any potential dividends and, on the total assets in general. The fundamental concept of a company's equity price is as an expression of expected future cash flows, or dividends. If any potential dividends are hoovered up by preference shareholders (eg UK govt) first, this massively devalues the ordinary stock. Slotting themselves in at preference share level on the UK banks' balance sheet has effectively eliminated any motivation for the average investor to be an ordinary stockholder of these companies and so, diminished their ability to raise anymore equity capital. Which, in turn, reduces their ability to recapitalise.
By simply blanket guaranteeing its indigenous banks' debt and deposits, the Irish government has immediately stabilised the Irish banks' credit worthiness and so, unlocked a staggering amount of funding from third parties within the money markets (and outside Ireland) while, still retaining the option to invest the taxpayers' hard cash in their equity. They have yet to write a cheque to any of the banks while Gordon has already committed over £75bn of taxpayers money. The Irish guarantee has ensured that foreign money has flocked to fund the Irish banking system while, Gordon has already committed the UK taxpayer to massive equity interests in the UK banking sector. The former has successfully manipulated global capital markets while the latter has regressed UK society back to socialist fundamentals of the pre-Thatcher government.
Meanwhile, on mainland Europe, German industrial production rises by 3.4% in September from the previous year and France continues to tow the europhile party-line. Merkel and Sarkozy continue to blame blase Anglo-US attitudes to leverage while Trichet seemed hellbent on ignoring everything expect soon-to-be-extinct inflation. The thinly veiled strategy of tailoring European fiscal policy to suit the German economy has backfired spectacularly. Trichet's merciless insistence to ignore the faltering Irish, Spanish, Italian, and Greek economies by maintaining European base rates at 4.75% has completely eliminated any credibility he may have ever enjoyed. Today's rate cut, in tandem with the Fed, BOE and others can only have been agreed to under duress from someone like Bernanke. Ridiculously removed from reality perhaps but, Mervyn King has managed to say nothing on behalf of the BOE to the market over the past two weeks. Outstanding!
Bottom line is that Europe and the UK, has found itself seriously lacking in the leadership department. A slightly flawed but, well meaning, and speedy, effort will outperform a slightly flawed, poorly executed and delayed plan every time. Expectation management is the key to effective fiscal policy formulation. Disappoint and you will be sunk.
WnG
Tuesday, 7 October 2008
Between a rock and a hard place...
In the past 10 days, Ireland have unilaterally guaranteed their banks' deposits and dated senior and subordinated debt to the tune of €400bn; Greece have put a 100% guarantee on all Greek deposits; and Spain have upped their deposit guarantee to €100k per person and set up a €40bn fund to purchase distressed toxic assets from Spanish Banks.
All these steps have been taken in the midst of the senior European leaders from Germany, France, and the UK, convening pointless meeting after meeting. They've made vague statement after vague statement. Accused each other of causing the crisis in the first place and, finally, decided upon a pathetic €50k per person deposit guarantee. Jean-Claude Trichet has continued to obsess about inflation and insist that he has no part to play in helping to ease the crisis, while maintaining European base rates at 4.75%. As bad as this sounds, Mervyn King hasn't even bothered to comment for the past two weeks. However, the result is that the unilateral actions of countries like Ireland, Greece, and Spain, have completely undermined the authority of the ECB and the European Union as a concept. The vast majority of market participants view this as an inevitable backlash against the ECB's thinly veiled predilection to tailor fiscal policy to suit the German economy alone, while the smaller European countries struggle to cope.
The fallout would seem to be that the ECB has lost all credibility and the EU itself stands on extremely shaky ground. Gordon Brown and Alistair Darling have cemented themselves in the annals of history as infamous Hamlet-esque procrastinators, while the market panic in the City of London pointed firmly at the source of all that is rotten in the state of the UK economy (namely, confidence in anything). The pitfalls of disappointing the free market forces of equity and debt traders can be most acutely seen by the hesitation of US congress in passing their banking bailout bill. The relief that greeted the announcement of the Fed beginning to use its €700bn war chest in the US commercial paper market lasted all of 30 minutes, and the market then proceeded to fall again. The corollary of this reaction can be seen in the reaction of the Australian, Israeli, Spanish, and Irish markets to unexpectedly decisive intervention by their respective fiscal policy makers. If you promise the moon but, deliver the sun, the reaction is glorious in its relief. However, If you promise the moon, dither, delay, and finally deliver the moon, the free market forces will crush you with its disappointment.
While all this has been happening, possibly the most significant development has been in a non-EU country in the north Atlantic. Smack-bang in the middle of new US-Russian shipping routes revealed by the Arctic circle retreat and, on the front line of the old Cold War divide, Iceland has played a quietly significant part in global foreign policy for many years. A founding member of Nato and a geographically crucial ally of the US throughout World War II and the Cold War, Iceland has long been a crucial pawn on the international chess board.
It first came to significance during WWII when US military intelligence discovered Hitler's plans to use Iceland as a launch base for his V-2 missiles to attack American soil. Ever since, the US has kept the Icelandic nation close and have, bar a hiatus from 1946-1951, maintained a military presence there since 1940. Such has been the importance that US foreign policy has consistently placed on Iceland that, they were given a very generous share of the Marshall plan aid package at the end of the war, despite not one bomb landing on its soil. In 1952, the US intervened to solve a fishing rights dispute with the UK, which saw the banning of all imports of Iceland fish to the UK. Prompted by the offer by the Soviet Union of an oil-for-fish agreement, the US jumped to Iceland's side and politely made the UK see sense. In 1955, President Eisenhower publicly begged the question why the US didn't just buy up the entire export of Icelandic fish. In 1956, British authorities caved in to end the dispute and concluded that, to "increase the economic dependence of Iceland on the Soviet bloc would also strengthen the hands of the communists in Iceland, whose aim is to deny the United States the use of the vital air base at Keflavik and to bring about the withdrawal of Iceland from the North Atlantic Treaty Organisation." Echoes of a recent squirmish in the former easter-bloc.
Given this history, there has always been recognised within the credit markets, an implicit guarantee by the US to step into the breach to rescue Iceland in any major catastrophe. Today, the Icelandic Prime Minister, Geir Haarde, revealed that they "have not received the kind of support that we were requesting from our friends. So in a situation like that, one has to look for new friends." Most news agencies around the world assumed this barb to have been directed towards the EU however, it would seem they have all missed the reference to their historical 'friend', the US. The subsequent dash into the arms of Russia and the talks currently taking place to negotiate the terms of a €4.5bn loan are an inevitable product of the US economy's current malaise and a turning of the diplomatic screw by Moscow following the crushing of Georgia's petulant attempt to underline its alliance with Washington and, its desire to join NATO. Yet another example of the impossibility of fighting on multiple fronts, so explicity underlined by our Russian comrades.
We'll never know for sure what conditions will be placed on this loan but, should the US presence at Keflavik airport be 'encouraged' to discontinue, we could only conclude that Russia is taking every chance to flex its new found muscle in the direction of its long-time adversaries.
The Cold war is alive and well and the new front is in the north-Atlantic. While the credit crunch plays itself out, save a thought for how the political landscape is changing. Will the EU and the Euro survive? Will Ireland become an even more strategic US economic and military ally? And, will Norway finally crack open its breathtakingly large piggy bank to take advantage of the global equity market autumn sales? Only time will tell. Eyes-down on the bingo cards folks!
MNG
All these steps have been taken in the midst of the senior European leaders from Germany, France, and the UK, convening pointless meeting after meeting. They've made vague statement after vague statement. Accused each other of causing the crisis in the first place and, finally, decided upon a pathetic €50k per person deposit guarantee. Jean-Claude Trichet has continued to obsess about inflation and insist that he has no part to play in helping to ease the crisis, while maintaining European base rates at 4.75%. As bad as this sounds, Mervyn King hasn't even bothered to comment for the past two weeks. However, the result is that the unilateral actions of countries like Ireland, Greece, and Spain, have completely undermined the authority of the ECB and the European Union as a concept. The vast majority of market participants view this as an inevitable backlash against the ECB's thinly veiled predilection to tailor fiscal policy to suit the German economy alone, while the smaller European countries struggle to cope.
The fallout would seem to be that the ECB has lost all credibility and the EU itself stands on extremely shaky ground. Gordon Brown and Alistair Darling have cemented themselves in the annals of history as infamous Hamlet-esque procrastinators, while the market panic in the City of London pointed firmly at the source of all that is rotten in the state of the UK economy (namely, confidence in anything). The pitfalls of disappointing the free market forces of equity and debt traders can be most acutely seen by the hesitation of US congress in passing their banking bailout bill. The relief that greeted the announcement of the Fed beginning to use its €700bn war chest in the US commercial paper market lasted all of 30 minutes, and the market then proceeded to fall again. The corollary of this reaction can be seen in the reaction of the Australian, Israeli, Spanish, and Irish markets to unexpectedly decisive intervention by their respective fiscal policy makers. If you promise the moon but, deliver the sun, the reaction is glorious in its relief. However, If you promise the moon, dither, delay, and finally deliver the moon, the free market forces will crush you with its disappointment.
While all this has been happening, possibly the most significant development has been in a non-EU country in the north Atlantic. Smack-bang in the middle of new US-Russian shipping routes revealed by the Arctic circle retreat and, on the front line of the old Cold War divide, Iceland has played a quietly significant part in global foreign policy for many years. A founding member of Nato and a geographically crucial ally of the US throughout World War II and the Cold War, Iceland has long been a crucial pawn on the international chess board.
It first came to significance during WWII when US military intelligence discovered Hitler's plans to use Iceland as a launch base for his V-2 missiles to attack American soil. Ever since, the US has kept the Icelandic nation close and have, bar a hiatus from 1946-1951, maintained a military presence there since 1940. Such has been the importance that US foreign policy has consistently placed on Iceland that, they were given a very generous share of the Marshall plan aid package at the end of the war, despite not one bomb landing on its soil. In 1952, the US intervened to solve a fishing rights dispute with the UK, which saw the banning of all imports of Iceland fish to the UK. Prompted by the offer by the Soviet Union of an oil-for-fish agreement, the US jumped to Iceland's side and politely made the UK see sense. In 1955, President Eisenhower publicly begged the question why the US didn't just buy up the entire export of Icelandic fish. In 1956, British authorities caved in to end the dispute and concluded that, to "increase the economic dependence of Iceland on the Soviet bloc would also strengthen the hands of the communists in Iceland, whose aim is to deny the United States the use of the vital air base at Keflavik and to bring about the withdrawal of Iceland from the North Atlantic Treaty Organisation." Echoes of a recent squirmish in the former easter-bloc.
Given this history, there has always been recognised within the credit markets, an implicit guarantee by the US to step into the breach to rescue Iceland in any major catastrophe. Today, the Icelandic Prime Minister, Geir Haarde, revealed that they "have not received the kind of support that we were requesting from our friends. So in a situation like that, one has to look for new friends." Most news agencies around the world assumed this barb to have been directed towards the EU however, it would seem they have all missed the reference to their historical 'friend', the US. The subsequent dash into the arms of Russia and the talks currently taking place to negotiate the terms of a €4.5bn loan are an inevitable product of the US economy's current malaise and a turning of the diplomatic screw by Moscow following the crushing of Georgia's petulant attempt to underline its alliance with Washington and, its desire to join NATO. Yet another example of the impossibility of fighting on multiple fronts, so explicity underlined by our Russian comrades.
We'll never know for sure what conditions will be placed on this loan but, should the US presence at Keflavik airport be 'encouraged' to discontinue, we could only conclude that Russia is taking every chance to flex its new found muscle in the direction of its long-time adversaries.
The Cold war is alive and well and the new front is in the north-Atlantic. While the credit crunch plays itself out, save a thought for how the political landscape is changing. Will the EU and the Euro survive? Will Ireland become an even more strategic US economic and military ally? And, will Norway finally crack open its breathtakingly large piggy bank to take advantage of the global equity market autumn sales? Only time will tell. Eyes-down on the bingo cards folks!
MNG
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