Wednesday, 8 October 2008

Newspapers : EU in Financial Turmoil Update 8th October

Bank shares slump again despite £500bn bail-out. Jon Swaine, The Telegraph (en)
" ... The plan will see the Government spend up to £50 billion - the equivalent of £2,000 for every taxpayer - on buying priority shares in the banks in order to boost their capital. Half is available immediately, while a further £25 billion can be used if necessary.
In addition, the Government will make £250 billion available to underwrite the banks' medium-term debts in an attempt to prevent a disastrous funding gap in the next few years.
Meanwhile the Bank of England will inject a further £200 billion into the money markets under its Special Liquidity Scheme - which sees banks swap risky mortgages for Treasury bonds. The scheme had previously been limited to £100 billion ..."

Financial Crisis: Remember 1929 - what seemed the end was only the beginning. Jeff Randall, The Telegraph (en)
" ... Replace 1929 with 2008 and the story, I’m afraid, is eerily familiar: a speculative orgy, crescendo, climax and crash. As this plays out, important people – business and political leaders – rely on “the power of incantation” to keep the rest of us calm. Their efforts are doomed to fail.
“Cause and effect run from the economy to the stock market, never the reverse. In 1929, the economy was headed for trouble,” wrote Galbraith ...
... Amid the carnage, there were buy-backs of stock by investment trusts, desperate to shore up their share prices. This resulted in a massive outflow of cash, just when liquidity was at its most precious. “They bought their own worthless stock,” wrote Galbraith ...
... Sadly, it was not the last. In 2006, Royal Bank of Scotland spent £1bn buying 54.3m of its own shares at an average price of £18.37. As late as December that year, it paid £141m for 7.1m shares (average price: £19.79). Yesterday, RBS shares fell by 39pc to just 90p ...

Bankers and politicians are stuck in 1929. George Blakey, The Telegraph (en)
" ... The Federal Reserve chairman, Ben Bernanke, an authority on 1929 and its aftermath, is known to have advocated throwing dollar bills out of helicopters to get things moving again, and in an election year, this would seem to be the only way to go ...
... Warren Buffett’s $5 billion investment in Goldman Sachs last week was a massive vote of confidence in Wall Street’s biggest player and, by inference, in Wall Street itself, but a cynical observer might detect an echo of John D. Rockefeller’s supposedly reassuring statement in October 1929 — “My son and I are buying sound common stocks” ."

Iceland: dancing on the brink of bankruptcy. Michael Savage, The Indepenent (en)
" ... "We are always considered a nation of fisherman, but with the boom of our financial sector and the huge money it generated were forgotten about a little bit," says Asbjorn Jonsson, the managing director of Fisk Kaup. "We are affected too of course – we hold loans with Icelandic banks and our loans are expensive. But the fishing industry will always be around, and the cheaper krona is helping us to export." Many Icelanders feel that the dramatic collapse of the financial sector was inevitable. But they are resigned to seeing through the hard times ..."

Amid all the panic, there is some good news. Hamish McRae, The Independent (en)
" ... The word is "systemic" - when the failure to support one institution leads to a breakdown of the entire system. It is a textbook example of what central bankers and finance ministries fear most and all past experience shows that if the authorities fail to do enough early on they have to do vastly more later.
They have two weapons, two things that only the state can do. They can create money and therefore ease liquidity concerns; and they can invest funds in institutions, backed by the taxing power of the state ...
... Even if in a most extreme case, the UK taxpayer had to invest £250 billion to recapitalise British banks, five times the number now being discussed, that would push up our national debt to GDP ratio to about 60 per cent of GDP. And of course there would be assets against those liabilities, assets that might be sold at a profit some years on. To put this into perspective, at the end of the Second World War, the UK's debt-to-GDP ratio was over 300 per cent and there were no assets against those debts ..."

Spain goes it alone as Europe squabbles . David Charter and Tony Halpin, The Times (en)
" ... Aleksei Kudrin, Russia’s Deputy Prime Minister, adopted his best accountant’s voice in telling journalists: “Iceland is known as a country with strict budget discipline and has a high credit rating. We positively regard this request.”
With the world’s third-largest foreign currency reserves, Russia can well afford the loan. It will look strange to domestic audiences, however, after a meltdown of Moscow’s stock exchanges to lows not seen since the crash of 1998. But this is also part of the explanation. Humiliated by its pauper status then, Russia sees itself now as a potential powerhouse.
President Medvedev is also arguing this week at a conference in France for the West to take seriously his calls for new forms of international cooperation on security. That now encompass-es financial security, and Mr Medvedev has put down a marker to Europe not to leave Russia out of any new structure for resolving banking crises."

Russia finds it is in same sinking boat . Editorial Comment, The FT (en)
" ... The call by Russia’s president, Dmitry Medvedev, for international action on the global financial crisis ... is a welcome sign that Moscow is ready to co-operate in responding to the gravest economic challenge in decades ...
... However, if hard economic realities have helped persuade Mr Medvedev to reach out to the west in general, and the EU in particular, so much the better. Nothing forms a better basis for co-operation than rational self-interest. Russia needs the EU just as much as the EU needs Russia. While Russia is the EU’s biggest energy supplier, the union is Russia’s largest source of energy revenues and dominant supplier of foreign investment. ..."

Facing a Financial Crisis, European Nations Put Self-Interest First. Nicholas Kulish and Graham Bowley, The NYT (en)
" ... In Berlin, where the financial crisis has emboldened criticism of the no-holds-barred, Anglo-Saxon capitalist model, officials argued that Germany, traditionally the European Union’s largest financial contributor, should not pay for a problem that began elsewhere.
Then on Sunday, Germany unilaterally promised to guarantee all retail deposits in its own banking system to calm the country’s skittish savers. “Trust, the most important currency for financial markets, has been lost,” Chancellor Angela Merkel said Tuesday.
In Brussels, the atmosphere is fraught over the national disarray on the financial crisis, but also with a sense that the criticism is unfair. Without a unionwide banking regulatory system or fiscal policy, any reaction to the crisis was inevitably going to be national in character.
And that, proponents say, only underlines the need for greater integration and regulation and the creation of some kind of pan-European fiscal architecture ..."

1 comment:

Anonymous said...

The government's rescue of the banks may stabilise the global financial crisis temporarily, but where the far bigger problem of economic stagnation and decline lies firmly upon the horizon now. The reason, with the US's total debt when all is taken into account at the end of 2007 was $51.1 trillion (projected to increase to around $53 trillion by the end of this year), sheer interest payments estimated at over $2 trillion a year, estimated toxic debts of financial institutions of over $4.1 trillion and total global debt exceeding $100 trillion (approx. 2-years of total global GDP output), no amount of capital injection will save the global economic system from eventual collapse as it is being pursued today. I give it no more than 18 months to fail.

The only situation that could bring global stability to the economic system is the influence of China and its direct intervention. Unfortunately pride by Western politicians will not allow this to happen, but where eventually they may have no other option but to take this decision to save the world economy from decades of economic stagnation. That is what we risk now with uncoordinated political indecisiveness in the West. These are plain truths and no more.

Dr David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland