Monthly Archives: October 2008

Training Session on the Spanish Bank Bailout Plan

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Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public.
Ben Bernanke, Deflation: Making Sure “It” Doesn’t Happen Here

Many of the macro-economic fundamentals of Spain today are very different from those of ten or fifteen years ago………..A lot of factors look better this time around. Compared to its history, Spain has low interest rates, low unemployment and a strong fiscal position……..the 2007 levels of government debt, unemployment and interest rates are about half the level of 1993. Equally, a lot of factors related to debt levels, housing and bank funding are worse versus the last downturn. For instance, the relative size of mortgage debt or total private sector debt to GDP, or the size of the construction sector to GDP, were all about 60% bigger in 2007 than in 1993. As was the bank system’s loan-to-deposit ratio. And the housing PE has expanded almost as much. So when Spanish bank management’s argue that the world today is not like the early 1990s, they are right: some things are better, but others are worse. As Mark Twain noted many years ago, history may not repeat itself but it does rhyme.
Spanish Banks, How Bad Can It Get? – Citigroup, September 2008

As I suggest in the title, the contents of this post resembles more an online training session about how the recent proposals to refloat and reinforce the Spanish banking sector may work out in practice than a conventional blog post, but still, this is the weekend, and at weekends, as well as all that interminable football, hiking and tapas snacks in bars, people are supposed to enjoy complementary and value-enhancing activites like going on courses, aren’t they? So why don’t we have a try. But remember, this topic is only for those with the sternest of stomachs, and the greatest of abilities to find – now what was the word Krugman recently used, ah yes, beauty – in that otherwise most arid of landscapes, the world of financial book-keeping.

So, as is the custom in all good training sessions, let’s all start by watching a video, just to get us in the mood, and into the swing of things as it were. I think after the viewing what follows may be a lot more digestable, and certainly it should be more comprehennsible. (The version is conveniently supplied with substitles in Castellano the benefit of any Spanish speaking readers who might drop by).

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Spain’s Economy Peers Timidly Out Over The Precipice – Towards The Abyss That Lies Below

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Après Moi Le Deluge

The condition of Spain’s economy is now deteriorating markedly and rapidly by the month. The recent bout of extreme financial turmoil is only likely to make things even worse in this regard. Output is down, domestic demand is down, exports are struggling, and unemployment is up. The tumultuous events of late August and early September in the global financial markets are now evidently making their presence steadily felt on the real economy. And since Spain’s banking and financial crisis continues to trundle on, with no effective remedy whatsoever being offered, the worst is, most definitely, still to come. This is going to be a long hard road to travel for what was once the blue eyed boy among the eurozone economies. Continue reading →

Distraction at the top

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Edward has been keeping you all up to date on the resurgence of calls to the IMF fire extinguisher due to the global banking crisis, and the Fund has no doubt welcomed the renewed interest in its present and future functions.  But in an unfortunate weekend news dump, it’s been revealed that IMF Managing Director Dominique Strauss-Kahn is being investigated by the Fund over an affair with another staffer [UPDATED].

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Libya Buys Italy As Colonialism Moves Into Reverse Gear

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Well taking my cue from the worthy and well thumbed play-book of the Brothers Coen, I thought I’d follow up on my long and indigestibly serious analysis of the plight of the Hungarian economy, with something in rather lighter vein. The Miss Iceland Look-alike show is not the only talent contest we are going to get to see over the coming weeks and months it seems. We are also apparently on the verge of watching a much more macho “Man-City/Emirates Stadium” look-alike one, since news today informs us that Libya at this very moment in the process of bailing out Italy’s much troubled banking system.

UniCredit SpA surged after Libyan investors including its central bank boosted their stake in Italy’s biggest bank and said they will invest more. The shares gained as much as 12 percent to 2.42 euros in Milan, valuing the bank at 32.2 billion euros ($42.4 billion). Libya’s investment is “good,” UniCredit Chief Executive Officer Alessandro Profumo told reporters in Milan. “It’s a confirmation of their interest in our company, which they also consider to be very attractive.”

The investment may be worth much as 1.3 billion euros, according to a note by Centrosim analyst Marco Sallustio published this morning. It could allow Libya to obtain a seat on the bank’s board. Central Bank of Libya, Libyan Investment Authority and Libyan Foreign Bank bought shares to boost their holding to 4.2 percent, the investors said in a statement late yesterday. They intend to buy as much as 500 million euros of securities that UniCredit plans to sell over coming months.

But of course, where do you think the greatest risk to the viability of Italy’s Unicredit lies? And what do think is the the principal reason why the country and its banking system need this sudden Libyan support? Well you might try looking “over there”, you know, where they are holding the Miss Iceland look-alike contest.

Here, courtesy of Reuters, are some basic facts about Unicredit: Continue reading →

Hungary Is Headed For A Substantial Recession As Foreign Exchange Lending Seizes Up

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Hungary’s agony has continued during the week with both currency and stock markets falling sharply while bankers continue to report acute credit shortages. At the same time contagion has started to extend its ugly reach right across eastern Europe, with Ukraine, the Baltics and Serbia (at a minimum) all in ongoing negotiations with the IMF, as the credit crunch which followed in the wake of the latest bout of global financial turmoil really starts to bite.

“Many central and eastern European countries simply don’t have either the financial strength or the technical expertise to bail out banks,” said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. “It’s like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.”

The ECB announced this morning that is to extend a helping to the suffering Hungarian markets, providing up to EUR 5bn of liquidity to the Hungarian central bank (MNB). This move will surely help boost the MNB’s defence of the forint. Hungary’s FX reserve is at present EUR 17½ bn. This equals less than 3 months of imports, which is normally considered to be the critical level for FX reserves. Among the EU8+2 countries, Slovenia (euro member), Lithuania, Slovakia, the Czech Republic and Estonia have similar small FX reserves.

Emerging-market banks plunged yesterday after Standard & Poor’s warned that Korea’s lenders will struggle to refinance debt, raising pressure on developing nations to bail out their own institutions. Standard & Poor’s has announced that it placed its ‘BBB+/A-2’ sovereign credit rating on Hungary on CreditWatch with negative implications. S& P has also placed the following ratings on Ukraine on CreditWatch with negative implications: its ‘B+/B’ foreign currency and ‘BB-/B’ local currency sovereign credit ratings on its global scale; and its ‘uaAA’ ratings on its national scale. Hungary has a ‘BBB+’ rating at Fitch and ‘A2’ at Moody’s.

In Budapest on Wednesday the forint fell 5.3 per cent to Ft266.09 to the euro and the BUX leading stocks index closed with a fall of 11.9 per cent, dragged down by a 15 per cent per cent fall of shares in OTP, Hungary’s biggest bank. Currencies and stock markets have also been falling in Poland, the Czech Republic, Romania and Ukraine.

The European Central Bank also announced yesterday that it will support the Hungarian central bank’s money market operations with as much as 5 billion euros ($6.7 billion) to help it ease the present financial tensions. The agreement will provide the central bank with a facility to borrow up to 5 billion euros in order to provide additional support to the central bank’s operations, the ECB said in a statement this morning. The move will support the Hungarian central bank’s “instruments of euro liquidity provision.” This move is an important “first”, since Hungary isn’t a member of the 15-nation euro region, a may well set a precedent which will need to be followed as more and more of the walking wounded limp over and present themselves at the Kaiserstrasse front door, before being politely shown round the back to the overnight lending window.

According to Portfolio Hungary:

Chaos rules among institutional investors, as well, at least the majority of the investment fund managers polled by Portfolio.hu on Wednesday admitted, speaking on condition of anonymity, that they have absolutely no idea about the possible outcome of the current financial crisis. A number of them noted they are at a loss as to what to do with their portfolios in the current situation. Interestingly enough, the only parallel the respondents were able to draw between the present predicaments and the 1998 Russian economic crisis was the mass unwinding of leveraged positions.

As one fund manager interviewed said “From this perspective, the current situation is the same as in 1998 only to the second power. Margin calls are being received, you gotta put in the deposits but as there’s no money you have to execute brutal sales irrespective of the price of assets…..Frankly, I haven’t got a clue as to when and how this would end, I’m just staring into empty space.”

One of the main problems Hungary is facing right now is that if foreign currency lending continues to be discontinued in Hungary on a “sudden stop” basis, then this will mean that domestic economic activity will slow sharply and capital inflows will be considerably reduced which is bound to cause one hell of a problem since at the present time these capital inflow amount to about €3-€4bn a year, and are close to providing the cover needed to fund the ongoing current account gap. Continue reading →

Annals of embarrassed academics

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Iceland Chamber of Commerce working paper May 2006, “FINANCIAL STABILITY IN ICELAND” by FREDERIC S. MISHKIN & TRYGGVI T. HERBERTSSON —

There are concerns that the banks could experience refinancing problems. Although the banks’ reliance on external financing poses the biggest risk to the financial system right now, the probability of a credit event occurring is low. The rapid credit growth in the banking system and the banks’ transformation from concentrating on domestic lending, to becoming international financial intermediaries, also presents some risk because the banks may not have been able to develop organizational capital fast enough to run their new business safely. These concerns have led to criticism of Iceland’s banks for lack of transparency. However, the Financial Supervisory Authority’s awareness of these risks and the fact that Iceland has high quality governmental institutions make it unlikely that there are serious problems with safety and soundness in the banking system.

OK, it’s easy to go back 2 years and do this.  But Mishkin is a big name who went to a 2 year stint on the US Federal Reserve Board of Governors right after this paper came out.   Thus if nothing else it’s symbolic of the optimistic conventional wisdom at the very top that financial globalisation could be handled.  It’s unlikely many Icelanders feel now that they had “high quality government institutions”.

Major Washington Agency Runs Iceland Look-Alike Casting

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“Many central and eastern European countries simply don’t have either the financial strength or the technical expertise to bail out banks,” said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. “It’s like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.”

As rumours abound about the imminent formal “bankruptcy” of the Hungarian economy – the BUX stock index fell as much as 11.9 percent yestoday, while the forint slumped 5.3 percent against the euro and liquidity in the foreign exchange market more or less evaporated – many commentators are asking the impertinent sounding question: “will Hungary be the next Iceland”. To that question I will answer with a categorical no. But not for the reason that most standard commentators offer, that, for example Hungarian private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, or that short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland. Continue reading →

Now Serbia Adds Its Name To Those In The IMF Sick Ward

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Serbia has also decided to ask the International Monetary Fund for additional support, according to a stament from senior government officials last Monday cited in Reuters.

“We are certainly not in a group of emergency cases, such as Hungary,” a senior official who asked not to be named told Reuters. “But we need the agreement for longer-term stability.”

So, to be clear, Serbia is not an “emergency case”, like Hungary for example – although it should be noted that the Hungarian government are stating that they are not an emergency case like Iceland, who are themselves not an emergency case, like Ukraine, for example, who are in no way to be considered as being in need of support in the way in which, let us say, Latvia is. And Latvia according to Prime Minister Ivars Godmanis is not any kind of case at all, and certainly not one to be compared with Serbia.

Well, make of all that what you will, but one thing is for sure, and that is that experts from the International Monetary Fund are going to have a role in drafting Serbia’s 2009 budget. And how do we know that? Well Serbia’s Prime Minister, Mirko Cvetkovic, told us, today. Strange isn’t it, but still, this hand in the budget drafting process should not be considered to be, bla bla bla.

Meantime Serbia’s currency (the dinar) has fallen 4 percent and the main stock indexes 30 percent in the last 10 days.

Serbia’s case is a little different from most of the others we are seeing since Serbia has only recently terminated an earlier arrangement with the IMF (which lasted from 2002-2005), and what is involved really is agreeing to a renewal of the previous arrangement, a move which the Serbian central bank had already been urging on the government in an attempt to improve Serbia’s credit rating. Since any IMF terms for additional support will likely result in tighter budgetary constraints, this is also to the central bank’s liking, since central bank Governor Radovan Jelasic has been a strong critic of recent government fiscal policy.

Only last month the IMF urged Serbia to aim for a balanced budget in 2009, to restrict public spending, to tame inflation and to cut its current account deficit from the present 18.5 percent of GDP to 10 percent in the medium term.

One local Serbian personality is, however, reported to be working on a formula which he feels might help his country in these difficult times. World Testicle Cooking Festival champion Ljubomir Erovic is apparently seizing the moment to spread his enthusiasm for his favourite food by issuing a new recipe book.

“I wanted to make something that we could be known by…to make a Serbian brand, not to be famous only for bombs, sanctions or corruption,” Erovic said at a friend’s inn in the wooded hills of central Serbia. Erovic’s electronic cookbook subtitled “Cooking with Balls” offers suggestions on how to cook on a grill or stove with various spices such as fresh rosemary, yarrow, thyme and basil, grapes and wine.

Sounds like something out of a Kusturika movie, doesn’t it?

Those of you with the stomach for reading something just a little bit stronger than testicle stew recipes, and with the curiousity to learn why it might be that what we are seeing happening now in Serbia was more or less inevitable, should enjoy reading my Serbia, Must What Goes UP Really Come Down post, written at the time of last November’s elections. Continue reading →

This Weekend in Thrilling European Administration

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There are essentially two basic critiques of the EU’s institutions; one is the classic, Monnet/Schuman house ideology view that its problems are simply because there isn’t enough of it. If it was more like the US federal government, it would work better; and, as we designed it to get more like that, it must be somebody’s fault. The British are usually the somebody, but Italy, Spain, Germany, and the new members are all candidates.

The other one is the classic Eurosceptic or libertarian (genus: north american) view, that all its problems are down to the fact that it exists, because it’s a bureaucratic monster operating a planned economy. (I didn’t say these had to be based on facts.) Usually, the evil monsters are either the French government or the EU itself, presumably meaning the Commission.

These myths meet the standard framework for understanding the EU’s politics at an odd angle. Power in the EU institutions is usually described by the tension between a supranational force, the Commission as the EU high priesthood and executive branch, and an intergovernmental force, embodied more by the European Council – the regular summit meeting – than the Councils of Ministers, the much more regular final legislative bodies. It nearly matches the two myths, in that the Commission and friends always skew to the first myth, following their interests, and the supporters of the second like to blame Brussels (i.e. the Commission) because it’s there.

But the standard model is getting old. For a start, where does the democratic power of the European Parliament fit in? You can’t just blow it off; ask Denis Olivennes and Nicolas Sarkozy what happened to their clever idea. It’s not supranational, it has national caucuses and its constituencies don’t often cross borders. But it answers to no national government, and very good that is too – remember the Kaczynskis’ attempt to unelect Bronislaw Geremek? And so much of its work puts it in the role of a loyal opposition to the supranational power, and for that matter to the national governments as well.

Them. At least the academics did spot the rise of the intergovernmental power; ever since the first European Council was called by Giscard in 1975, the intergovernmental power has got stronger. It used to be that the Commission proposed and the ministers signed off; now, much of the time, the Council takes a strategic lead, the Commission drafts suitable legislation, Parliament amends it, the ministers make a final decision, and then the Commission administers the finished job. Traditionally, it was seen as bad and anti-European that the intergovernmental wing of the union got involved; surely, if all those egos got going, nothing would happen…and something must happen, for Monnet prophesied it!

It was further thought that intergovernmentalism meant inaction. This was shared by both the myths – the true believers insist that we need an “economic government” (whatever one of those is), “reinforced cooperation”, anything so long as the Commission gets to be more like the US Federal Government, while the eurosceptics insist that only national governments acting alone can get anything done, or alternatively that government in general can achieve nothing and therefore it shouldn’t be encouraged.

Now, the Tartars have finally arrived out of the steppes; the crisis is upon us. Of course, the myth fans all find it equally supportive to their own myth. That economic government is trotted out again. This glibertarian nonsense gets another outing. But let us consider the system’s performance. To begin with it looked poor; as the third wave of the bank crisis arrived, everyone still thought bank failures could be handled as individual cases. The UK seized, and immediately resold, Bradford & Bingley; Belgium did likewise with Dexia, and then Fortis, with the Benelux states. The crisis kept up; it looked like no-one had any grip; but then, the mighty federal bureaucracy of the US Treasury Department was if anything even more lost.

In the event, the British announcement of last week pulled in one idea from Ireland (guaranteeing wholesale lending) and another from Sweden (equity recapitalisation), and probably owed quite a bit to the VoxEu paper; but it was the first serious suggestion to apply across the board and offer a comprehensive solution. Once it was out there, it took only one European Council and one Eurogroup meeting over the weekend to get consensus on the plan and press the trigger.

There’s a real sense in which the value of the EU is simply in getting into the habit of cooperation, and getting over the coordination/trust problems. Beyond that, it strikes me that the “laboratory” argument for federalism applies very well here.