Skip to main content

What nearly happened in the markets last week makes my blood run cold

In the middle of last week, exceptional measures were announced by a coordinated group of six central banks: the Fed, the ECB, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank. In effect they agreed to supply virtually unlimited Dollar liquidity to the market. The result has been a sustained market rally over the past few days. However it is only now beginning to sink in what lay behind the central banks' decision and how close the financial system just came to collapse.

It is now clear that the funding cycle, even for the best credits in Europe was getting dangerously short. Whereas a major industrial, like Unilever, could expect to fund US Dollar exposure for at least 30 days, by the beginning of last week, this was down to three days. If it was bad for industrials, it was becoming impossible for banks. US Dollar holders were not prepared to provide funds to several major Euro-zone banks at virtually any price.

They were simply unable to gain access to the US Dollar market.

Although this still has the status of market gossip, it seems all too likely that a significant number of the largest Eurozone banks would have collapsed last week unless the central banks had done what they did. Just to repeat, last week, the Eurozone came close to a multiple collapse of some of its largest brand name banks because they were not able to access funding in Dollars.

So clearly the action of the central banks was critical, but while necessary, it is not sufficient to address the crisis of funding. It is clear that several major houses do not have an independent future. A major banking restructuring is now very much on the cards.

The German government has refused to address the private sector until the Eurozone fiscal/sovereign crisis is stabilized. Last week's near disaster shows how short sighted that policy has been. The fact is that the debt crisis can only be solved by coordinating debt write-downs and restructuring across both public and private  credits.

We had a very close shave last week, but while the liquidity issue is addressed, at least for the foreseeable future, the solvency issue is not. I do not think it is a coincidence that Commerzbank is being forced to take immediate remedial action to boost its capital ratios. 

Others will follow very shortly. Further retrenchment will follow. So in addition to a major fiscal contraction, the Eurozone must now deal with a large-scale contraction in bank funding. 

It is hardly a surprise that S&P has put all of the Eurozone countries on credit watch for immediate down grade

In the face of the determination of Berlin to impose fiscal control without actually providing credit support, it is a moot point as to whether the price for the Euro is actually worth paying. Even if the Eurozone governments believe it is, the years of recession ahead, amounting, lets face it, to a second Great Depression may see the voters changing their minds rather quickly.

So far the politicians are betting that closer fiscal union will work in the medium term.

Given the odds, that is not a bet I would be taking.


Richard T said…
Despite the very public displays of cordiality between Sarko and Merkel, there seems to be a suspicion of French chilly (if not cold) feet around. The first suspicion is that French finances are not as healthy as the official figures suggest; the second that in an election year, Sarko is surrendering sovereignty to the german market ideal which might be as uncomfortable for the French as the Anglo Saxon model. The Socialists might be OK but the rejuvenated Front National surely won't like it.

Popular posts from this blog

Concert and Blues

Tallinn is full tonight... Big concerts on at the Song field The Weeknd and Bonnie Tyler (!). The place is buzzing and some sixty thousand concert goers have booked every bed for thirty miles around Tallinn. It should be a busy high summer, but it isn´t. Tourism is down sharply overall. Only 70 cruise ships calling this season, versus over 300 before Ukraine. Since no one goes to St Pete, demand has fallen, and of course people think that Estonia is not safe. We are tired. The economy is still under big pressure, and the fall of tourism is a significant part of that. The credit rating for Estonia has been downgraded as the government struggles with spending. The summer has been a little gloomy, and soon the long and slow autumn will drift into the dark of the year. Yesterday I met with more refugees: the usual horrible stories, the usual tears. I try to make myself immune, but I can´t. These people are wounded in spirit, carrying their grief in a terrible cradling. I try to project hop

Media misdirection

In the small print of the UK budget we find that the Chancellor of the Exchequer (the British Finance Minister) has allocated a further 15 billion Pounds to the funding for the UK track and trace system. This means that the cost of the UK´s track and trace system is now 37 billion Pounds.  That is approximately €43 billion or US$51 billion, which is to say that it is amount of money greater than the national GDP of over 110 countries, or if you prefer, it is roughly the same number as the combined GDP of the 34 smallest economies of the planet.  As at December 2020, 70% of the contracts for the track and trace system were awarded by the Conservative government without a competitive tender being made . The program is overseen by Dido Harding , who is not only a Conservative Life Peer, but the wife of a Conservative MP, John Penrose, and a contemporary of David Cameron and Boris Johnson at Oxford. Many of these untendered contracts have been given to companies that seem to have no notewo

KamiKwasi brings an end to the illusion of Tory economic competence

After a long time, Politics seems to be getting interesting again, so I thought it might be time to restart my blog. With regard to this weeks mini budget, as with all budgets, there are two aspects: the economic and the political. The economic rationale for this package is questionable at best. The problems of the UK economy are structural. Productivity and investment are weak, infrastructure is under-invested and decaying. Small businesses are going to the wall and despite entrepreneurship being relatively strong in Britain, self-employment is increasingly unattractive. Red tape since Brexit has led to a significant fall in exports and the damage has been disproportionately on small businesses. Literally none of these problems are being addressed by this package. Even if the package were to stimulate some kind of short term consumption-led growth boom, this is unlikely to be sustainable, not least because what is being added on the fiscal side will be need to be offset, to a great de