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Global Credit Crisis Weekly Wrap-Up

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The global credit bubble dwarfs by orders of magnitude the credit bubble preceding the Great Depression.

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Inquiring minds just might be asking for a quick global recap of the current state of affairs in the global credit crisis. Here goes:

Global Credit Crisis European Style

ECB emergency fund tapped for €3.9 bln

Minyan Peter: Why Europe Matters More

Minyan Peter: Should we see more trouble in the European bank market - and remember, we've already taken down two German banks and a British bank - I believe that all bets are off on the dollar/Euro exchange rate. At least in the short run.

Global Credit Crisis U.S. Style

Commercial Paper Market in U.S. Shrinks for Seventh Week in Row, Fed Says

The U.S. commercial paper market shrank for the seventh straight week as the Federal Reserve's interest rate cut fails to improve conditions for short-term credit.

Debt maturing in 270 days or less continued its biggest slump in seven years, falling $13.6 billion in the week ended yesterday to a seasonally adjusted $1.855 trillion, including a $17.3 billion decline in asset-backed commercial paper, according to the Federal Reserve in Washington. The week's decline is smaller than the previous week's drop of $48.1 billion, a sign that buyers are starting to return to the market after the Fed's half-point reduction Sept. 18 in its benchmark interest rate

You have to love the spin with this statement: "The week's decline is smaller than the previous week's drop of $48.1 billion, a sign that buyers are starting to return to the market".

Mr. Practical on Collateral:

The Federal Reserve executed a whopping $38 bln in repos this morning. Apart from the size, the most amazing thing is that it took $22 bln in mortgages as collateral. Perhaps I was wrong when I said the Federal Reserve would not wreck its balance sheet in attempting to reflate the economy. This is truly stuff of a Banana Republic.

Mr. Practical on the Countrywide Mortgage Restructure Free-For-All:

It is merely an attempt to delay the inevitable restructuring can take many forms, and from CFC's perspective what it is attempting to do is essentially extend a life line to higher risk borrowers.

This of course has consequences, such as immediate cash flow/earnings impact, and the associated impact on ABX pools and CDOs as outlined below.

Further, it introduces perhaps the unintended consequences that the writer puts forth--that is a deliberate attempt to get one's mortgage restructured at terms favorable to the borrower.

Global Credit Crisis Canadian Style

Canadian Credit Crisis in a nutshell

  • $40-billion in ABCP is frozen.
  • The Québec Pension Plan (Caisse) and the Ontario Teachers' Pension Plan are on the hook as are 40 other trustholders, mining companies, paper companies, etc all of which thought they were buying short term easily marketable notes.
  • What they were really buying was toxic waste from troubled mortgage loans in the U.S.
  • A workout plan called the Montreal Accord was originated by Caisse. The proposed solution was to convert short term debt to long term debt some of which stretches out all the way to 2015, just to break even.
  • While this may suit the needs of Caisse, some companies need money now to fund mine operations and the like. Those companies do not want their money tied up for years.
  • "Most noteholders [still] don't know what they're holding."
  • Uncertainty over the frozen $40-billion ABCP is spilling over into the rest of the credit market in Canada, driving down demand and forcing companies to cancel projects because of the soaring costs of funding.


Global Credit Crisis Russian Style

Russian liquidity trouble starts to boil

A senior Russian banker warned on Wednesday of debt defaults as the liquidity squeeze in Russia tightened following the global credit crunch and interbank lending rates climbing to a two-year high. "If debt markets remain closed until the end of the year the situation is going to get very difficult for many banks," said Oleg Vyugin, chairman of privately owned MDM Bank and former head of Russia's financial markets regulator.

"There could be some defaults. The Russian ruble bond market is not working."

Overnight lending rates in Russia climbed to 10 per cent, the highest since mid-2005, even after the central bank on Wednesday pumped an additional $2.56 bln into the banking system via two one-day repo auctions.

"Banks are not lending to each other," said Alexei Yu, a fixed income trader at Aton brokerage. "But it is largely due to internal reasons. Tax payments are falling due at the end of the month and at the end of the quarter, banks must bring their accounts in line with the regulations of the central bank. By the beginning of October, the situation will ease."

I see "the situation [in Russia] will ease by the beginning of October".

Since that is just two days away, I feel obliged to ask "What year?"

Global Credit Crisis UK Style

UK public finances worse than expected

The UK government's finances swung into deficit in August, registering the worst readings for that month since records began, official data showed on Monday. The public sector borrowed £9.1bn in August, £2.3bn more than in the same month the previous year and above forecasts for borrowing of £6.6bn.

Richard McGuire, strategist at RBC Capital Markets, said the figures suggested there was "little scope for the government providing much in the way of a counterbalance to likely much softer growth in the private sector."

If that was not bad enough, The Bank of England fears squeeze on companies.

Evidence that the credit squeeze will hurt the UK economy emerged yesterday when a Bank of England survey showed companies were likely to be hit hard by higher borrowing costs. This was followed by one of Britain's biggest housebuilders reporting plummeting sales in the wake of the Northern Rock crisis.

The news came as recriminations over the handling of Northern Rock continued with Richard Lambert, director-general of the CBI employers' organisation blasting the Bank, the government and the Financial Services Authority at a dinner in Newcastle last night.

He said the tripartite system had "been found wanting under fire", creating scenes on Britain's streets that should occur only in a "banana republic".

Global Credit Crisis Chinese Style

Beijing imposes price freeze

China is to enforce a freeze on all government-controlled prices in a sign of Beijing's alarm about rising popular anger over inflation, now at its highest rate in more than a decade. The order freezes a vast array of prices still under the control of government in China, ranging from oil, electricity and water to the cost of parking and park entrance fees.

"Any unauthorised price rises are strictly forbidden . . . and in principle there will be no new price-raising measures this year," the ministries said.

Current Conditions Summary

  • Public spending is out of control in the US and UK.
  • Banana Republic charges are being leveled at the US and UK.
  • Runs on the bank occurred in the US and UK.
  • The Fed is accepting mortgages as collateral in the US for the first time.
  • Foreclosures are at all time high in the US.
  • The US dollar is at all-time lows.
  • Japan is still struggling with deflation.
  • Two failed banks in Germany were bailed out by the ECB.
  • There are US Congressional threats of tariffs against China.
  • There is a proposal to freeze short term commercial paper for up to 7 years in Canada.
  • Housing bubbles in the US, Spain, and Australia are deflating.
  • Housing bubble in Canada is still inflating.
  • China refuses to float the RMB and sterilize US dollars flooding in. That in turn is fueling Chinese inflation.
  • Price controls that can't possibly work were implemented in China in response to Chinese aforementioned Chinese inflation.
  • Commodity prices are soaring.
  • Oil is at record high prices.
  • A massive carry trade in Japan is fueling a plethora of asset bubbles around the globe.
  • $500 trillion in derivatives are floating around dwarfing the size of the global economy.
  • The global credit bubble dwarfs by orders of magnitude the credit bubble preceding the Great Depression.

Other than the above, the global economy seem pretty normal and rather well balanced. It's a tribute to just how well central bankers have done their jobs.

No positions in stocks mentioned.
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