Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘financial crisis

The U.S. economy and housing – part I

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UShouseprices

In 2006 when the housing market popped in the U.S. the sound of fear and uncertainty was heard in hallways of financial institutions around the world. In the meantime most investors have lost their last shirt and millions more their providing jobs over it.

The world’s central banks spear-headed by the Federal Reserve have pumped trillions of dollars into moribund financial institutions to shore up their liquidity and to guarantee the perpetual flow of credit. To this day bankers can prod themselves with mission accomplished, financial Armageddon has been avoided and instead of the Great Depression, Great Recession has taken over the tabloids.

No doubt the Greta Depression is not a very appealing alternative, it is therefore understandable that the captains of this financial fire-sale rescue have become the new heroes of the establishment. The leader of the pack is of course Ben Bernanke, chairman of the Federal Reserve Open Market Comedy, who as a scholar of the Great Depression has led the great rescue operation of 07/08/09 by pumping up the balance sheet of his institution and shoring up liquidity on Wall Street.

Today sure enough reports surfaced of Bernanke’s reappointment as Fed chairman coming January. His guaranteed position at the helm of the Fed serves the current establishment and was therefore all but certain, though his well accepted speech at economist heaven at Jackson Hole last weekend might have helped.

In his speech did he not suggest that financial institutions cannot by themselves, no matter how carefully done, take full responsibility of their liquidity risk management? This sounds surprised but it really should not. According to Bernanke, central banks now and forever must be prepared to provide liquidity and credit provisions to financial firms in trouble.

I can only imagine the applause that erupted on trading desks of Wall Street’s most venerable institutions. From now on no risk can be too big and no bonus too gratifying, ‘cause Ben the savior will always be there to provide the necessary dough and pay with taxpayer’s money for the tab.

Unfortunately for helicopter Ben his success will not be measured by the smirks on the faces of bankers alone but rather by the strength of the economy and health of the job market. This will by and large depend on the recovery in the U.S. housing market. July’s data for existing home sales have been very encouraging, up 7.2 percent from June at the fasted pace of sales rates in ten years. Still much of it is in the from of distressed sales but even there the rate is declining to 31 percent from 50 earlier in the year.

Supply is still heavy but not as strong as it once was, obviously there is light at the end of the housing tunnel. Prices are still coming down nationwide, with the median sales price falling another 2 percent on the month at $178,400. But there is more good news.

In Southern California, one of the hardest hit areas during the downturn of the U.S. housing market, home sales and prices show a surprise recovery. The specter of homeownership is starting to reemerge from the short hibernation of the last couple of years. Its no surprise really and if you can believe it, it never rains in Southern California.

In Los Angeles County sales were up a staggering 19 percent in July compared to last year and the median home price rose to $321,000 but this is still much lower than peak median Southland home sale price of $505,000 at the height of the real estate bubble. Despite its recent rise the median home sale price remains at 2002 levels and is 47 percent below its peak level. Foreclosures are still dominating the sales and suppressing prices but that could change within the next twelve months.

In the San Francisco Bay Area even high end sales are recovering with homes sold at or above the $500,000 range, the highest since September 2008. With jumbo loans reemerging the high end market finally has a pulse again. This is propping up median prices which are still 40.6 percent from peak values but 36.2 percent off the lows in March 2009.

In New York City foreclosures in the five boroughs were up 14.8 percent in July compared to last year. Auction events usually draw crowds of thousand people and more participating in the bidding and snapping up bargains. So far this year Auction.com has auctioned more than 20000 foreclosed homes across the nation for $1.4billion.

Investors are rediscovering their appetite for risk in real estate assets in a big way, with some properties going for cents on the dollar at foreclosure auctions. Private-equity players are turning to IPOs in a rush not to miss the fun at the biggest buying bonanza of troubled real estate assets since the bubble burst. Since June big boys like Apollo Global Management, Colony Capital and Starwood Capital have filed with the SEC to launch their IPOs of new real estate investment trusts (REIT).

The specter of returns in excess of 100 percent is what makes the investor’s heart beat faster. Some are still cautious and think the biggest buying opportunities are twelve months out, but with federal financing programs like TALF and PPIP low cost financing of troubled assets is a win-win-win situation, for some even the best one in the past 50 years. Of course this strategy is not without risk, the economy is far from healthy and the job market is still declining, which could make expected bargain prices still a bad deal if the underlying value does not come back.

Asked if the housing market could set itself up for another bubble, perpetual housing bear and U.S. economist Robert Shiller entertained at least the possibility (see video). According to Shiller low interest rates and high affordability are positive, high inventory of unsold homes and recent experience are negative for the housing market. An exceptionally weak recovery would of course trump everything else and push the U.S. economy closer to depression.

Historic facts do not support those eager housing bulls now crawling out from under their covers. Historically, from peak to trough, it takes more than four years for housing prices to bottom. Since prices nationwide peaked in 2007, for some areas prices will still have to fall further. Moreover, usually it takes 10 years for house prices to fully recover.

For the housing market to turn around the economy needs to recover first. Now the annoying thing is that for the economy to recover the housing market needs to recover as well. A strong interdependence is here at work and the economy reinforces housing and vice versa. In other words what happens to housing is crucially important to the economy.

Another bear, Nouriel Roubini, who correctly predicted the recent downturn in the debt fueled U.S. economy suggests the recession is far from over. In many other advanced economies, similar to the U.S., the bottom in the economy is quite close but has not been reached yet. In the U.S. overcapacity, a damaged financial system and still overleveraged households will dampen any strong recovery in the economy and therefore in the housing market.

Even if some would insist to dip once and then end it, Dr. Doom’s diagnosis is a double dip recession. The dilemma is with monetary policy, because Bernanke and friends are damned if they do and damned if they don’t, mob up excess liquidity that is. All things equal according to Mr. Roubini the economic recovery will be anemic rather than robust.

In the past during economic downturns the economic model of the Federal Reserve has worked like a rubber band, you pull it hard and the economy snaps back. If asset prices plunge on one side a re-inflation trade props up asset prices somehow somewhere else. This time the rubber band could just have popped.

Historically downturns caused by financial crises are not typical cyclical recessions and last on average of 4.8 years. Growth spurts can occur and inventory restocking will contribute to positive growth in the coming quarters, but at this point it is unclear what would come after that.

The key to the gates of heaven or Dante’s inferno for a recovery in housing and the economy are the credit markets. Availability of loans for people and businesses is critical in any sustained recovery going forward. Yet the shadow banking system with its many corridors and lifts of credit distribution is still dysfunctional.

While the recession is raging the ratio of private household debt to the nation’s total economic output rose to 97 percent in the first quarter, up from 45 percent in 1975. Americans are saving more to pay down debt and savings rate has jumped to 5.2 percent of disposable income by the second quarter of this year. Roubini thinks savings rate has to go much higher, and this will hold down consumption. Shockingly, savings going up a percentage point decrease spending by more than $100 billion.

This newfound frugality might be well underway and the world has to prepare for a cutback in consumer spending and residential investment. It is difficult to see what could replace the American consumer in the global economy.

Is CRE the next accident to happen?

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Commercial real estate is shaping up to become another causality of the financial crisis and CRE mortgage delinquencies and loan defaults are now starting to pile up on the balance sheets of US financial institutions. That is of course on top of losses from residential real estate, consumer credit and the securitization markets that sort of connect all the sore spots on Wall Street.

$817 billion of total CRE-loans are still outstanding in June, 2009, and about 29 billion have run into trouble. In the month of June loan delinquencies soared by $10 billion heating up the debate about future CRE losses by financial institutions.

But that’s not all. About $105 billion worth of troubled loans have been worked out. A majority of those loans experienced an averaged loss of almost 64 percent. Delinquency rates on CRE are up to 4.5 percent in the second quarter from 3.6 percent in the first quarter, 2009.

Similar to residential real estate CRE property prices have also collapsed. Moodys/REAL Commercial Property Price Index (CPPI) has not bottomed as of April 2009:

CREallPropertynationalindex

In CRE much like with residential real estate many loans have been securitized and actual losses to financial institutions and investors will therefore depend largely on two conditions. First, the total amount of loan defaults will be substantial given the collapse in prices. Second, FASB statements 166 and 167 will determine how big the losses are or if they can be deferred onto some future time horizon.

FASB statements 166 and 167 refer to securitized loans in special purpose entities, and require banks to consolidate insufficiently capitalized SPEs onto their balance sheets. Although this should foster more disclosure for investors its impaired with whims of possible rule-bending.

FASB determination to implement these rules is another uncertainty factor. In April, 2009 FASB halted fair value accounting to stop the hemorrhaging of impaired financial assets. Statements 166 and 167 are supposed to take effect in the first fiscal quarter beginning after November 15, 2009.

Some are already preparing for the worst. Bank of America now expects to bring about $150 billion back onto its balance sheet under the new FASB rules. This 150 billion off-balance-sheet assets comprise of $12 billion home equity conduits, $85 billion card securitizations, and other variable interest entities make up the remaining $53 billion. Maybe BofA is just lucky.

Wall Street – Washington Connection, Part I

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DimonandBlankfeininWashington

When we think about the financial crisis on Wall Street and in the economy we try to figure out why it happened, who was responsible and how can we prevent it from happening again in the future. Today we still have a lot more questions than we have answers, but the sun is beginning to shine, and one issue is starting to emerge which probably for years and years has been tucked away from the public’s view.

This crisis is pulling the blanket of secrecy from a bunch of Wall Street bankers smooching and spooning undercover with Washington’s big guys for the last several decades. Of course we would expect them to be somewhat embarrassed about busting their secret arrangements, maybe even flee the scene to break up their unholy unity for good. Much to our surprise none of this is actually happening.

Mr. Dimon, chairman and head of JPMorgan Chase, has sought to ratchet up his business of influencing Washington in late 2007, when the financial crisis hit and the democrats together with the Obama administration were beginning to settle in. Jamie Dimon together with Goldman’s Loyed Blankfein are among a rare breed of executives who have not jeopardized their companies by taking unwise decisions. Both CEOs in the meantime have returned all funds received from Treasury’s capital assistance programs (CAP).

These days JPMorgan’s chairman comes to town about twice a month and not twice a year as he used to. He met with Treasury secretary Geithner, White House economic advisor Lawrence Summers, and several lawmakers in recent months and gets a list from his staff to call a half-dozen public officials each week. He has made it a regular thing to nurse his precious Washington relations to make sure he is not kept out of the loop.

When JPMorgan wanted to return its TARP funds his influential connections helped him to ease the terms for banks allowing them to repay the money. In the end Washington caved in to Dimon’s complaints about limitations for hiring skilled foreigners and on executive pay. He also helped thwart attempts to lower the principal on mortgage payments which would have benefited homeowners.

Another contentious issue is Mr. Dimon’s objection to regulate the market for credit derivatives by keeping part of it independent from regulated clearing operations. Fees from underwriting over-the-counter credit derivatives are a major source of income for JPMorgan Chase.

Mr. Dimon’s connections to Washington date back to his day at Citigroup when he offered Mr. Rahm Emanuel, then senior advisor to president Bill Clinton, a job at the firm. Today Mr. Emanuel serves in the Obama administration as White House Chief of Staff. William Daley, former commerce secretary and influential Chicago lobbyist, is also currently on JPMorgan’s payroll. Mr. Dimon mindfully replaced some of his staff with wired democrats to better serve his Washington agenda. 

Most surprising is his connection to Treasury secretary Geithner. Mr. Dimon holds a seat on the board of the New York Federal Reserve. Mr. Geithner served as president of the NY Fed till he joined the Obama administration in January of this year. How can a CEO of a public company sit on the board of a federal regulator? That’s like John Gotti being a member of the U.S. Department of Justice.

For the first time this Monday JPMorgan Chase held a meeting of the firm’s board in the nation’s capital. Messrs. Geithner and Emanuel were both invited, but only the chief of staff first agreed to later withdraw not to appear too cozy with Wall Street bankers. This invitation is nonetheless testament to the arrogance of invincibility that has shrouded executives of our most powerful corporations.

In Washington nothing gets done without support from Wall Street and Wall Street knows it. Wallshington is more important and influential than the oil industry, the industrial complex or even the powerful military. This has never been so true like it is today with a handful of firms left unfettered from the crisis and government’s control. Their power is more concentrated in the hands of a few and therefore even more difficult to control.

Executives on Wall Street get whatever they wish from every administration or congress there is. This too big to fail monster is sucking the lifeblood of morality, decency and sustainability out of a societal fabric that once was the envy of the rest of the world.

In the latest report for the period ending July 17, 2009, the Treasury department listed employed funds under the Troubled Asset Relieve Program (TARP). The financial industry received $204.2 billion, $70.2 billion have been returned, leaving the industry with a total of $134 billion outstanding. In the automotive industry $77.8 billion from 79.9 are still owed to the taxpayer. Automotive suppliers received a more humble $3.5 billion. Targeted investments in Citygroup and Bank of America totaled $40 billion and asset guarantee programs for Citigroup another $5 billion. The Troubled Asset Loan facility (TALF) committed $20 billion. Rescuing troubled insurer AIG required another $69.8 billion.

To this day the financial and the automotive industry owe the taxpayer $350 billion, yet government has devoted only $18.7 billion in home affordable modification programs to avoid foreclosures. While taxpayers were required to fund the bailout of Wall Street with 350 billion dollars the financial industry is reluctant to modify loans and scores of families are still forced out of their homes.

This current administration with the most eloquent president since years will have a hard time to sell this to the general public. Wall Street firms reverting to old habits by once again doling out mega bonuses to their club members will not make it any easer.

Is there a rift between the democratic party and the Obama administration?

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Obama-democrats

I have written about Goldman Sachs and how the investment firm contributed to the worst financial crisis since the Great Depression. Matt Taibbi alluded to GS as The Great American Bubble Machine contributing substantially to all major investment bubbles since the 1930s. GS has always been a talent hotbed where privileged alumni leave the firm through what Stieglitz calls a revolving door to end up in critical positions of government. The list of those exiting Goldman and entering the government is long, but it is clear that they are all associated with the Democratic party.

Next to this one there could be another list, one of detrimental political decisions that contributed to the current crisis. On top of it is the repeal of the Glass-Steagall-Act under former GS employee and Bill Clinton’s Treasury secretary Robert Rubin, which allowed bank holding companies to own other financial institutions and eventually become too big to fail and a systemic risk. This of course was never intended but as we painfully recognize one of those far-reaching wrong judgments made by a democratic administration. In light of this anything but impeccable track record we have to ask if democrats are truly forthcoming in their desire for real change or are they about to make another big mistake?

In November of 2008 a new spirit of political leadership in the US was finally entering into the halls of congress and the White House. President Obama has promised to bring change to Washington and the democratic party vowed to stand beside him and his ambitious agenda. In the meantime democrats together with two independents have a sound filibuster majority of 60 in the senate. They are now calling the shots in the government and the legislature. It is therefore even more disturbing to see how the House of Representatives overwhelmingly rejected a signing statement from their president.

In June a $106 billion war supplemental bill passed legislation in the House and Senate which included conditions on World Bank and IMF funding. The bill would extend a credit line of $108 billion for international financial institutions (IFI) to aid struggling developing economies crippled by the current financial and economic crisis. Major recipients of IFI funds could be nations in Eastern Europe under immense pressure to devalue their currencies in an attempt to avoid a default scenario. This would have a ripple effect and threaten the stability of the global financial system similar to events during the Asian crisis in the late 90s.

Despite severe and eventually devastating consequences to an already ailing global financial system of such a devaluation scenario, resistance is mounting among lawmakers who view IFI funding as an unnecessary ‘global bailout’ . To reach a compromise and find the votes to pass the bill House and Senate leaders included restrictions resulting in an amendment requiring the Treasury department to report on World Bank and International Monetary Fund (IMF) activities. Late Thursday the amendment passed with strong bipartisan support and an overwhelming majority of 492-2 votes against the Obama administration.

The president in a statement during signing of the original bill rejected this restrictions and vowed to ignore the amendment’s conditions. They would "interfere with my constitutional authority to conduct foreign relations (with international organizations and foreign governments)… by requiring consultation with the Congress prior to such negotiations or discussions," Obama said in the signing statement. With the passage of the amendment lawmakers including Barney Frank, a democrat and head of the powerful House Financial Services Committee (HFSC), are now threatening to withhold funds in a stand-off with the Obama administration.

492 to 2 speaks a clear language and it remains to be seen if the administration can afford to ignore congress under these conditions. Though it certainly would mean a severe blow to the authority of the president if he will be forced to revoke his signing statement. His foray into environmental politics (see also here), for the first time opening up the United States to international commitments to substantially reducing carbon emissions, could be called into question. So could his commitments he made during his Moscow speech (see also here), to the establishment of an international body together with and under the leadership of the U.S.

Much needed reform in Washington away from neoliberalism towards true and sustainable world leadership hangs on a thread. While first signs emerge of a search for an effective international body that more truthfully represents interests of all nations in a global economy, the coverage of the G-8 summit in Italy by mainstream media in the U.S. suggests otherwise.

The media are either ignoring or mocking efforts of the G-8 to increase the scope of their discussion round tables by opening it up to other powerful nations like China, Brazil, India, Mexico, South Africa and others. The NYT writes: “Eventually, the so-called Group of 8 started what might be considered auxiliary clubs. And that was how they ended up with a meeting on Thursday that was actually dubbed the G-8 + 5 + 1 + 5. Seriously.”

The Times also calls into question the relevance of the G-8 if they seemingly cannot take landmark action without enlisting others, and misses the point completely: It is not about relevance of the G-8 but rather about sustainable credibility within the G-15, G-20 or even G-194. It is not about America but rather about sustainable relations between all nations in a political and economic environment more and more intertwined by globalization. If we have learned nothing else from the current financial and economic crisis this should be it.

Leaving other nations out makes the G-8 nothing but an elite club of snobbish leaders who in a reactionary move desperately seek to conserve neoliberal, neoconservative mindset. Barak Obama, Angela Merkel, Nicolas Sarkozy and other powerful leaders understand that and therefore support this search for a new international world order. Reactionary dinosaur politicians will eventually face the same destiny. In the meantime there are still too many of them and they are still very powerful. President Obama’s stand-off with the congress on the issue of the signing statement serves as a litmus test about the determination towards change in a modernized America.

Criticizing Goldman Sachs – better late than never!

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During the last several decades Wall Street has become the great American money machine only to fall into disgrace during the current financial crisis. Many blame a proverbial greed that took hold during the great boom for the current financial and economic malaise. Today none of the highly regarded firms that once ruled the street still exist. Some have gone under, taken over by their bigger rivals, and even those that survived changed their status from investment firm into a more humble bank holding company.

One of those firms still around is Goldman Sachs. The firm founded in 1869 by a German Jewish immigrant, Marcus Goldman, has become the leader of the pack among Wall Street investment banks. In 1999 the firm went public and hence started their myth of infallibility and unlimited prosperity that surrounds Goldman up to this day.

The financial crisis on Wall Street reached even into the halls of Goldman’s upper echelons. As part of the Federal Reserve’s effort to save the financial industry from collapsing GS received billions of dollars of taxpayer monies in the from of TARP funds. In June 2009 GS was among 10 firms able to pay back all the money they received from the government. Sure enough some weeks later GS announced that it soon will be in a position to grant the highest compensation package ever to its employees. (see also: CEO needed for some – historic bonuses for others)

No talk about the new modesty on Wall Street now that GS is free from government influence, but the rest of us is still marred by economic contraction and financial hardship the likes of it we have not seen since the Great Depression. So how come that Goldman seems to be invulnerable and does not feel the pain?

Matt Taibbi, writer for the Rolling Stone, a magazine also known for its often enigmatic and controversial political coverage, lashes out at Goldman: The Great American Bubble Machine. He follows through by trying to explain how Goldman Sachs has engineered every major market manipulation since the Great Depression.

from Matt Taibbi’s blog: If America is circling the drain, Goldman Sachs has found a way to be that drain, an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The drain that has the capacity to defeat democracy is according to Taibbi relative simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.

Matt sees the same pattern of a basic scam going as far back as the Great Depression, and most recently identifying Goldman’s role during the internet bubble, the housing bust and even the huge spike in oil prices.

from Matt Taibbi’s blog: Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures agreeing to buy oil at a certain price on a fixed date. ….. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

The nice thing about Taibbi is that he also does not refrain from name-calling, namely those who graduated from GS only to end up later in some important government position. Former GS CEO Henry Paulson and Bush’s secretary of Treasury, the architect of Wall street’s bailout funneled trillions of dollars to his friends in the industry. Robert Rubin, Bill Clinton’s Treasury secretary, joined GS in 1966 where he stayed as Co-Chairman till 1992 only to end up later as chairman of Citigroup. John Thain, Robert Steel, Joshua Bolton, Mark Patterson, Ed Liddy, the head of the World Bank, the head of the New York Stock Exchange and two heads of the Federal Reserve Bank of New York were all on Goldman’s pay list at some point or another.

Not surprisingly Taibbi focuses on Robert Rubin, the former Goldman banker turn Treasury secretary under Bill Clinton, whose persona was hyped as the smartest person ever to walk the face of the Earth. The repeal of the Glass-Steagall Act, which allowed investment banks, commercial banks and insurance companies to engage in merger, was one of the political hall marks achieved by Clinton’s then Treasury secretary Rubin.

In 1998 Travelers Insurance group, the owner of brokerage firm Smith Barney, announced a $76 billion merger with US bank Citigroup. The deal closed after the repeal of the Glass-Steagall Act in November 1999. A few months later after Clinton’s term in the White House had expired, Jeff Rubin became chairman of Citycorp, which after the merger with Salomom Smith Barney created the largest financial services company in the World. During his tenure at Citicorp Rubin earned several hundreds of millions of dollars in compensation. Today Citicorp is at the center of the storm on Wall Street and subsequently the global economy.

Taibbi modifies a misconception of mostly blaming Republicans for Wall street’s deregulation. The repeal of the Glass-Steagall-Act which is according to many at the core of the current financial crisis, is clearly the result of politics made by Democrats. In fact Goldman has very long standing and deep ties with the Democratic party. GS was the number one campaign tributer to president Obama. 

Regardless of which political party is to blame most, it seems obvious that Goldman graduates by occupying important government positions could deliver to their parent firm whatever they wanted and needed. Paulson’s bailout of insurance giant AIG serves as good example. Thanks to the bailout GS got paid in full for their bad bets. Homeowners or retirees who lost their live savings in the current crash are not that lucky. Taibbi concludes: The collective message of all of this – the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds – is that when it comes to Goldman Sachs, there isn’t a free market at all. 

Nobel laureate Stieglitz calls Goldman the great American revolving door, through which the firm’s executives first leave only to end up in some high level government position. Once this has expired they enter the firm again through its revolving door and continue their ill gotten endeavors. In doing so they effectively block much needed financial reform of the financial services industry.

read also: Goldman Sachs – Weltmacht mit Drehtür, DIE ZEIT, 02.07.2009 Nr. 28

from Wikipedia this list of former GS alumni certainly reads like a who-is-who among American power brokers:

GSalumni

Austria – is there an emergency plan for Eastern Europe?

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Back in January this year experts from the EZB, IMF, EBRD and Austrian government together with representatives from the largest banks in the country met almost secretly to what has been called ‘Gedankenaustausch’. Officials denied it was a crisis meeting but rather a swapping of ideas about how best to meet the challenges threatening the stability of the country coming form Eastern Europe.

Noble laureate and US economist Krugman even claimed that the country is at severe risk of default because of its off the charts exposure to Eastern Europe. Krugman: “So what I said …..— that after those two (Iceland and Ireland), it’s (Austria) probably the advanced country at most risk from the financial crisis — shouldn’t even be controversial.”

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The professor does not even deem it controversial and yet Austrian officials both from politics and financial industry maintain the crisis is manageable and not as bad as some might fear.  Walter Rothensteiner CEO of Raiffeisen Zentralbank (RZB), one of Austrian’s biggest banks, does not agree with international organizations like the IMF that his bank will need more government funds in 2010. Of course those funds are expensive. So far RZB has requested 2.5 billion euro from the government (that’s almost 30 percent of core capital!). Rothensteiner refuses to make any projections about the magnitude of possible NPLs in his firm.

Recently economist Paul Hilbers, head of IMF’s monetary and financial systems department, downplayed the threat coming form Eastern Europe. “We don’t see a threatening default scenario. Austrian banks are facing a difficult time in Eastern Europe, but I wouldn’t call them threatened," Hilbers said.

Today the OECD again warned of more risks to the financial stability of the country through its heavy Eastern European exposure. They recommend to the Austrian government to prepare emergency plans in case the financial and economic crisis should get worse. In addition OECD experts suggest further cross-boarder initiatives to handle the crisis.

There are no official emergency plans known. Maybe they do exist though. Even the OECD admits so far Austria has weathered the storm better than others, but I sincerely hope that politicians and experts do not turn off electricity entirely when they all go on vacation in the coming months. Better yet hopefully there will be no emergency at all, at least not in the months of July and August.

Written by Alfred

2. July 2009 at 1:15 pm

This crisis is far from over

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This weekend finance minister of the G-8 nations gather in the south of Italy hopefully not only to take a sunbath. While leading economists are still warning of high uncertainty regarding growth and systemic risk for financial contagion still lingers the G-8 finance ministers are already discussing a possible exit from fiscal and monetary stimulus programs.

This seems premature. The subprime fiasco seems largely over but other problems prop up in particular in Eastern Europe. This region of the former communistic Soviet Union is a going concern. While some of the worst fears are probably exaggerated systemic risk and possible contagion for some Central European banks still lingers.  Banks in Austria, Germany and Sweden have 1.6 trillion US dollar loan exposure in the region.

Of particular interest is the Baltic mini-state of Latvia. GDP of Latvia was 36 billion US dollar in 2008 but problems might spread to neighboring countries yet and get out of control. Just recently foreign exchange markets got upset by failure of Latvia’s bond auction.

Sweden is Latvia’s biggest creditor and its banks have heavy exposure to the Baltic state. Recently Sweden’s Riksbank borrowed 3 billion euros from the ECB. That shows how serious the situation is. The bank is drawing down on a 10 billion euro swap agreement.

Latvia is now in negotiations with the IMF to secure another round of funding, but first it has to implement spending cuts and restrictive fiscal measures, which could further dampen the outlook for growth and lead to even higher unemployment.

But Latvia is not the only problem. About a third of fund managers polled expect more Eastern European countries to default and about 11 percent expect a full-blown systemic meltdown. This has prompted the ECB to issue a warning for 2010 rather than 2009 if the recession lingers.

According to the European Commission 27 EU states have so far pumped 3.7 trillion Euro into rescuing the banks, that’s almost a third of European GDP. Out of that pool 311 billion have been in the form of direct capital injections, that is more than US banks received.

In the meantime the German government has agreed to implement a ‘bad-bank-model’ where large regional banks, like the German Landesbanken, will be able to transfer their bad investments worth about 600 billion euros until 2010. A similar drastic measure might be necessary for Austrian banks too. It seems to be a weird coincidence that this dumping institution for bad assets has been named after a beautiful Italian opera, AIDA.

Complicating the situation is a moldering conflict within the IMF, where funding in the US seems to be called into question. A proposal to send $108 billion is attached in a supplemental appropriations bill to fund the wars in Irak and Afghanistan. While funding for the wars is most likely to be approved the IMF has come under criticism, mainly because of lack of economic stimulus measures among European states.

Republicans and Democrats in the House of Representatives oppose the fund because they fear that the money will mainly be used to bail out Central European banks. If the administration will fail to garner sufficient votes they can pull the funding bill out and support a war-only funding bill. That’s a smoking gun for Eastern Europe and Central Europe alike.

will it cause a snowball effect?

latvia_exchange_rate_1000_usd

Written by Alfred

12. June 2009 at 11:13 am