Moneymanagement’s Weblog

Financial crisis taking nations under

Posted in banking, Uncategorized by moneymanagement on October 10, 2008

 

Move over America the financial crisis in Europe aims at being bigger than anything Americans have faced. This crisis is about to take nations under with it.

It is not just the banks but also the countries that are about to declare bankruptcy

Kaupthing Bank hf, Landsbanki Islands hf and Glitnir are highly leveraged, like other now-troubled banks. The banks’ assets reached €100 billion, about 10 times the country’s gross domestic product last year, and their foreign depositors have come to far outnumber the island’s population.

Today, Iceland’s swollen banks are ruined. In the space of a few days, practically the government has seized the entire banking system. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Switzerland – the banking haven is on verge of a break down and the governement cannot rescue it. Here is why…

Switzerland’s gross domestic product totals 512 billion Swiss francs (€332.1 billion). UBS’s balance sheet adds up to 2 trillion Swiss francs (€1.3 trillion) — four times as much. Even Switzerland’s second biggest bank, Credit Suisse, oversees assets totalling 1.2 trillion Swiss francs (€778.4 billion). Together UBS and Credit Suisse have over 640 billion Swiss francs (€415.1 billion) in outstanding loans.

 

Britain is looking at a  bailout package for its banks with plenty of stings attached.

Next to go under seems to be Austria…Germany looks sold as of now but France is on very shaky grounds.

 

BBC has an excellent summary about what is happening in Europe

 

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3 Responses

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  1. Vinod Chand said, on October 10, 2008 at 4:56 pm

    If leverage is the single most important reason for failure, what is the status of ICICI bank on this front?

  2. moneymanagement said, on October 10, 2008 at 10:41 pm

    ICICI Bank is rumoured to be in bad shape and according to Morgan Stanley – it the most shaky bank in Asia followed by Axis Bank.
    Money Vidya has been following this issue and you can see thier latest post here
    http://www.moneyvidya.com/blog/indian-bank-borrows-rs-1000-cr-at-20-icici/

  3. pmiddlebrook said, on October 11, 2008 at 10:04 am

    Market Mayhem and Meltdown: What is at Stake?

    The ripple effect of the ‘global’ financial crisis will likely erode the shores of once affluent economies for decades to come. Furthermore, it is going to take a lot more than a Keynesian slight of hand to correct two decades of easy money, poor oversight and weak market self-regulation. But what is really going on? Is this caused by the credit crunch, who is to blame and what if anything can be done?

    The current situation is, I believe, not really caused by the credit crunch at all. This is surely the effect of other causes. Massive over-leveraging, gargantuan over-valuation of assets, excessive spending and a culture of financial risk taking all within a remarkably unregulated market place are surely more logical candidates! The causes, because they are deep rooted and structural, will therefore take many years of radical reform to correct.

    The long term implications of the current crisis are quite profound on three fronts. Firstly, the impact on the long term structure of capital markets. Secondly, the likely effects on long run economic growth forecasts and thirdly, on the shape and trajectory of international relations too – much to the chagrin of US and UK political leadership. Furthermore, with the middle classes taking the lion ‘share’ of the hit as bourses threaten to gravitate ever closer towards ground zero, the once heavily invested middle-classes will be reluctant to engage in potentially risky private equity deals and corporations may have to rely on governments as bankers of first rather than last resort.

    The global financial system prevalent throughout the 1990s and throughout much the early millennium is of course a direct manifestation of the structure of capital accumulation itself, and of the social structures that it relies upon. It is therefore not just credit markets but the entire economic ideology which is the very root of the problem. Evidence for this simple deduction can be seen by the burgeoning income disparity (within and across countries) and the rapid return to Keynesian economics to ward off the wicked witches of financial discontent.

    The bailing out of private equity markets whose traders and brokers have, if you listened to the television and read the newspapers, been somewhat cavalier about asset valuation, its packaging and global re-sale has ushered in a return to protectionist policies that were radically done away with during the Reagan and Thatcherite era! What is different now though is that the US and UK once outsourced industrial production to China and India, but this time Indian companies are beginning to outsource their industrial production to countries such as the UK; Abbey Works in Wales is now owned by Tata Steel; a case in point.

    Whether the crisis emanated from the United States as claimed by Gordon Brown or not, no market has remained untouched, and losses are being felt evenly across every corner of the globe. The source of the problem therefore is not so easily confined to the US alone. It is rather a collective failure to adequately regulate an economic ideology that we have all, albeit to differing degrees, contributed to. Moreover, anybody who has borrowed excessive levels of finance over and above their means simply can not be immune from criticism. As a result, and reflected in the global downturn, this situation is no longer a US or European crisis – it is a universal. It is what HIV is to health and although there is no long term cure, for now, we will just have to keep on taking the medicine.

    That the profit seeking interests of credit rating agencies, when combined with the equally un-tethered profit seeking interests of investment bankers (who love leverage) are combined, as Warren Buffet famously asserted with regard to derivatives, ‘financial weapons of mass destruction’ are born. That the period of easy money started with the oversight of Alan Greenspan in 1995 need not go un-noticed and his voice has been surprisingly silent in the aftermath of such widespread destruction. It is therefore, not the mistakes of Paulson and the like that have got us to this point, it is the work of many, in all countries now affected by the financial crisis.

    Of course, if the leverage ratio (total assets divided by stockholders equity) of firms such as Lehman’s Brothers was at 30.7:1, then it is of little surprise that when US$500 million defaults, the house of cards comes tumbling down. Lehman once boasted having ‘a culture of risk management at every level of the firm’. Yet as we now know, Lehman’s like others were not just gambling with their own money they were of course gambling with ours. Moreover, even though the full price tag of such mal-practice has yet to hit the fan, the current age of complex financial products which are highly ‘securitised’, ‘futured’ and ‘derived’, only makes understanding who owns what, at what price, and in a falling market almost impossible to decipher. In all likelihood, the US$700 billion bail out, different but similar to that in Europe, will be the thin end of a heavily overleveraged wedge.

    Yet, if the truth be told it is in fact not only the greed and poor financial decision making of CEO’s that brought us to this juncture, it is also the greed and poor financial decision making of each and every person who has lived radically beyond their means. None of us is immune. In 2007, when the camels back finally broke, I was shortlisted as an executive for a well know German bank who offered a base salary of US$500,000, with a guarantee of US$500,000 and then a share in the up side. I thought the wages absurd, but would I have signed if offered? OK, back to the story.

    Providing 100 per cent mortgages to the unemployed is foolhardy at best! But, if in order to buy a house or use a car people need to go into debt while it means that individuals, families and now entire economies are living well beyond their natural productive value, it also means that the costs of these basic resources are also hugely overvalued. This crisis is, therefore, about the right-sizing of assets and bringing value back in line with actual national product. Moreover, as financial services are a supply and demand partnership, a contractual relationship between two risk taking free-agents, we all clearly need to accept blame in some shape or form for partaking.

    The current meltdown signifies the end of a particularly unsustainable form of capitalist accumulation whose ideology was the first casualty of the securitisation crisis that started at the end of the second quarter in 2007. Patients with cancer can still carry on daily business, but as the illness deepens, there comes a pivotal moment when complete metastasis kicks in! Radiotherapy (like state bail outs) buy time, we know that, but it does not remove the causes of cancer. A radical change in lifestyle and diet is usually what the doctor ordered!

    Of course, because there is no supra-national global financial watchdog (the IMF is as out of step with the crisis as the average hockey mum!) each country is now on its own, hatching bail plans to keep market liquidity flowing, trying desperately to reassure petrified private equity markets that this is little more than a temporary blip. As the UK, with some justification, buys shares in our banks, with the hope that tax payers will gain in the up side, in so doing we also cement a new kind of public-private partnership that will forever change the face of the financial services industry.

    With CEO’s pay capped, dividends questioned and rights-issues contested the highly motivated profit seeking individual needs to ply their skills (urgently) in another industry. Saving the environment, solving poverty and making conservation both sexy and profitable is the new leadership we now need.

    The winners in this situation will be those individuals, families and countries who have lived within their means, who run surpluses, who are self-sustaining, who can export skills and goods. The US, like parts of Europe in particular, are running increasingly unsustainable budget and trade deficits and with global military deployments to maintain in Iraq, Afghanistan, South Korea and Japan, former Eastern Europe and now Africa, economic contraction will only make the task of stabilising the periphery more challenging than ever!

    Of course, if in the process, rising second world economies are also taking major positions in US and European equity markets, they also stand to gain heavily in any eventual upside too – which is of course fair enough and all above board. But with many financial market specialist quitting the US and Europe in favour of the warm trading winds of the Middle East and Asia, the balance of global economic power is surely shifting like quick-sand as I write. Economies are falling onto recession by the hour. But this is not new and history stops for nobody. New partnerships are created, some rekindled and others die; the process of renewal moves on.

    I just better hope that in the process our leaders are smart enough to make sure that the next generation of financial products have their values firmly rooted in what is good for us all long term not what makes a quick buck over the short!

    For more on the finacial crisis visit http://www.petermiddlebrook.com


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