The coming days
The week ahead
Another presidential debate, and other news
• THE world’s finest scientists and peacemongers will see if their efforts are rewarded with a Nobel prize. The awards for medicine, physics and chemistry are handed out on consecutive days beginning on Monday October 6th. On Friday the winner of the peace prize will be announced. The latter has attracted some criticism in recent years because of the awarding committee’s wide sense of what constitutes a valuable contribution in the field.
For background, see article
• JOHN MCCAIN and Barack Obama go head-to-head in the second in a series of three presidential debates on Tuesday October 7th. Unlike the first event, which centred on foreign policy, the showdown at Belmont University, in Nashville, Tennessee, will be in the style of a town-hall debate, with questions coming from a group of uncommitted voters and covering both foreign and domestic issues. Both candidates are sure to get a grilling on the financial crisis and their support for a Wall Street bail-out that is far from popular with voters.
For background, see article
• INVESTORS will hope for a less traumatic week for the markets after the passage through Congress, at the second time of asking, of a huge bail-out for Wall Street’s embattled financial institutions. Other ways to keep banks afloat and ensure that the financial system does not suffer any further catastrophic failure will be discussed by finance ministers and central-bank governors from the group of seven rich countries. They meet in Washington, DC, on Friday October 10th to discuss ways to lessen the financial turmoil. The day before, in London, the Bank of England meets to set interest rates.
For background, see article
• BEIJING'S clogged thoroughfares are set for some respite. After rules to restrict traffic during the Olympics proved to be successful in reducing pollution, China’s authorities are set to introduce more permanent measures to cut emissions from car exhausts and reduce congestion. On Saturday October 11th a six-month trial will begin that bans different cars from the Chinese capital’s streets each working day; around a fifth of cars face the chop every day, depending on license-plate numbers. At weekends it will remain a free-for-all.
For background, see article
Oct. 6 (Bloomberg) -- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.
``The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are ``consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.
Today's steps follow a hoarding of cash by banks that sent the premium on the three-month London interbank offered rate over the Fed's benchmark interest rate to a record. Industrial companies are also finding it harder to raise cash after the market for commercial paper shrank to a three-year low as investors flee even borrowers with few links to mortgages.
``It is pretty much all out war,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., New York. ``They are pulling out all the stops to try and get borrowers and lenders to meet and do transactions once again.''
Implementing part of last week's emergency legislation to shore up the financial industry, the Fed said today it will begin paying interest on the cash reserves banks hold at the central bank. The step should give Fed officials greater power to inject cash into banks without interfering with their benchmark interest rate, which stands at 2 percent.
Bernanke Speech
Fed Chairman Ben S. Bernanke's speech on the economic outlook tomorrow in Washington should give an indication of whether U.S. central bankers are prepared to cut the main rate before the next meeting Oct. 28-29, Rupkey said.
As part of today's steps, the Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, the Fed said.
Money market rates are climbing worldwide on concern the deepening credit crisis will cause more financial firms to collapse. Three-month Libor climbed to 4.29 percent today, the biggest premium over the Fed's benchmark since the central bank began using a target for the overnight federal funds rate between banks as its main tool around 1990.
In Europe, governments rushed to shore up their faltering banks as the credit crunch worsened there. BNP Paribas SA agreed to buy Fortis's units in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion) after a government rescue failed, while the German state and financial institutions put together a 50 billion euro rescue package for Hypo Real Estate Holding AG.
International Effort
President George W. Bush's working group on financial markets, a body that includes the Fed, Treasury, Securities and Exchange Commission and Commodity Futures Trading Commission, said today it's working with ``market participants and regulators globally to address the current challenges to restore confidence and stability to financial markets.''
The working group statement comes four days before a gathering of central bankers and finance ministers from the Group of Seven major nations in Washington.
The Fed gained the authority to pay interest on commercial bank reserves under the $700 billion financial-rescue legislation approved last week. The Treasury will purchase distressed assets from financial companies under the plan.
To finance the Treasury's new plans, officials are considering changes to federal government debt sales, including a reintroduction of three-year notes. Any changes will be released at the Treasury's Nov. 5 quarterly announcement on sales of long-term debt.
Treasury Issuance
The Treasury also said that some of its cash-management bills may be ``longer-dated.'' The expansion in issuance is needed to ``allow Treasury to adequately respond to the near- term increase in borrowing requirements,'' the department said. Treasury officials last month also started a special program of bill auctions to help the Fed expand its balance sheet.
Fed payments on required reserves will be made at the average targeted federal funds rate established by the Federal Open Market Committee over each so-called reserve maintenance period less 10 basis points.
In addition to the cash banks must hold at the Fed, lenders also sometimes place excess reserves. The central bank said today it will pay interest on those funds at the lowest targeted federal funds rate for each period less 75 basis points. That will put a floor under the actual fed funds rate each day and let the Fed `expand its balance sheet as necessary to provide the liquidity necessary to support financial stability.''
Managing Rates
The Fed created the TAF auctions of cash to commercial banks in December, and has continually expanded the program since then. To prevent a surfeit of funds in the system from pushing the actual overnight interbank lending rate below the Fed's target, the central bank withdraws liquidity through repurchase operations.
As the Fed pumped cash through the TAF and other programs at record levels last month, the New York Fed had difficulty controlling the daily federal funds rate. While the target is 2 percent, the effective rate was below that level every day from Sept. 19 to Sept. 29.
Oct. 6 (Bloomberg) -- Commodities markets are heading for the biggest annual decline since 2001 as investors exit leveraged bets and slowing economic growth erodes demand for raw materials.
The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show. UBS AG, the Zurich-based bank that bought Enron Corp.'s energy unit in 2002, plans to exit most commodity trading. About 15 percent of investors in Boone Pickens's BP Capital LLC hedge fund may want their money back.
The same credit-market seizure that led to last month's bankruptcy of New York-based Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co. is squeezing speculators who drove commodities to record highs. Slower expansion in the U.S., China and India is also undermining prices of crude oil, which fell 39 percent, and corn, down 46 percent.
``The day of steadily rising commodity prices is over,'' said Chris Rupkey, the New York-based chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. ``A lot of the demand for commodities has been speculation, and now that demand is falling away because of fear taking hold in the market.''
The CRB, which doubled from 2001 to a record 473.97 on July 3, may drop 15 percent this year, said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. The last time the index lost that much was 2001, when the U.S. sank into a recession. It's down 11 percent for the year.
Price Outlook
A global slowdown may cause crude oil to plunge another 45 percent to $50 a barrel next year, New York-based Merrill Lynch said in an Oct. 2 report. Goldman Sachs Group Inc. cut its forecast for copper next year by 12 percent to $8,265 a metric ton and aluminum by 18 percent to $2,920 a ton.
Corn may tumble as much as 10 percent to $3.87 a bushel in the next six months, and soybeans by 4.5 percent to $8.85 a bushel, said Don Roose, president of U.S. Commodities Inc. in West Des Moines, Iowa.
Investors who embraced commodities as an investment class like stocks and bonds, while demand from China and India eroded supplies faster than they were replaced, are now in retreat.
Copper fell by as much as 6.9 percent today to a 20-month low, soybeans dropped as much as 6.8 percent and palm oil by 11 percent as the rout deepened.
Investors Exit
Outstanding contracts for 17 commodity futures traded in New York and Chicago fell 26 percent since a peak on Feb. 29 to the fewest in two years, data compiled by Bloomberg show.
Net-long positions, or bets prices will rise, held by hedge funds and other large speculators fell to 7 percent of total open interest for futures on Sept. 23 from 14 percent on March 25, according to an Oct. 2 report to clients by Barclays Capital in London.
The decline follows an unprecedented rally as the UBS- Bloomberg Constant Maturity Commodity Index of 26 raw materials rose every year since 2001.
About 450 commodity hedge funds held $80 billion of assets as of Sept. 1, up from $55 billion last year, said Brad Cole, president of Cole Partners Asset Management in Chicago. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested. They typically use borrowed money, or leverage, to amplify investments.
Commodity Leverage
Frankfurt-based Deutsche Bank AG, Newport Beach, California-based Pacific Investment Management Co. and Jersey- based ETF Securities Ltd. led Wall Street in creating funds linked to commodities indexes such as the Dow Jones-AIG Commodity Index or so-called exchange-traded funds that trade like stocks and buy raw materials such as gold, oil or cotton.
Futures, where a $12.50 deposit can control a $100 barrel of oil, allowed Dallas-based Pickens to earn $1.4 billion in 2005, Institutional Investor's Alpha magazine estimated. Michael Farmer and David Lilley at RK Capital Management LLP saw their Red Kite Metals fund in London gain 145 percent from inception in 2005 through the end of last year. Chris Levett, who founded London-based Clive Capital LLP, returned 17.6 percent in the first quarter on energy and metals bets.
Investments in commodity indexes reached a record $175 billion at the end of June, Barclays Capital said. Saudi Arabian Oil Minister Ali al-Naimi and Michael Masters of Atlanta-based hedge fund Masters Capital Management said speculation, not supply and demand, was responsible for increasing prices.
Changing Outlook
Crude oil quintupled from July 2002 to a record $147.27 a barrel on July 11, corn more than tripled from June 2006 to the highest ever, $7.9925 a bushel, on June 27. Gold more than doubled in the three years to March 17, when it reached a record $1,033.90 an ounce.
Prices dropped since June as the U.S. Dollar Index strengthened 9.6 percent in the third quarter, the most since 1992, economic growth slowed and bank losses from the collapse of subprime mortgages swelled to $586.6 billion, according to data compiled by Bloomberg. While President George W. Bush signed into law a $700 billion bank rescue plan Oct. 3, the leverage that pumped up commodities is unlikely to return.
``Easy credit is done, it's finished,'' said Robbert Van Batenburg, head of research at Louis Capital Markets LP in New York, a broker to institutional investors and hedge funds. ``I don't think there's going to be a quick end to this situation.''
The three-month London interbank offered rate, or Libor, that banks charge each other for 90-day loans in dollars, increased to 4.33 percent on Oct. 3, the most since January, the British Bankers' Association said.
Bailout, Volatility Benefits
Some investors and analysts expect commodities to rebound after the worst quarter for the CRB Index since at least 1956. The U.S. bailout may revive speculation as the government buys troubled assets, and record swings in prices may lure investors. The 10-week volatility in the CRB Index last month was the highest since 1973.
While economic growth is slowing, demand for food and fuel will continue to increase even if producers cut back supplies.
``I'm not bearish on softs,'' said Christoph Kampitsch, who helps oversee $1.5 billion in hedge funds at Erste Group Bank AG in Vienna. ``In nine to 12 months, soybeans, cocoa, sugar and wheat will recover. For agricultural products, there could be supply disruptions very easily. People also need to eat.''
Lower Output
The drop in prices may lead to lower production and create shortages as soon as next year.
``It's a wholesale liquidation of all assets as people became concerned about the economic outlook,'' said Angus Murray, founder and joint chief executive officer of New York- based Castlestone Management Ltd., with about $1 billion in assets. ``If this liquidation continues, commodities producers will stop producing. We'd end up with a severe shortage of commodities that would eventually boost prices back up again.''
Economists say U.S. growth will slow to 1.5 percent next year from 1.7 percent in 2008, according to surveys compiled by Bloomberg. China expanded 10.1 percent in the second quarter, down from 12.6 percent a year earlier, and India grew 7.9 percent, compared with 9.2 percent.
Institutional investors withdrew $5 billion from commodity indexes during the third quarter, according to Barclays Capital. The combination of outflows and dropping prices pushed assets under management in indexes down 31 percent to about $120 billion, the bank said.
Closing Funds
Every commodity in the CRB Index fell in the third quarter, led by a 44 percent drop in natural gas. The value of the 19 commodities fell to $374.8 billion on Oct. 1 from $655.4 billion on July 3, according to data compiled by Bloomberg. The total value of those futures contracts on Oct. 1, 2006, was $271.9 billion.
Ospraie Management LLC, once the world's largest hedge fund dedicated to natural resources, told investors Sept. 2 the New York-based firm would close its largest pool after slumping 38.6 percent for the year. Pickens said Sept. 30 that investors in BP Capital asked for the option to withdraw money after more than $1 billion of losses on energy trades this year.
RK Capital fell as much as 30 percent in August as copper and aluminum fell to six-month lows, dropping 6.8 percent and 8.9 percent, respectively. Its Red Kite Metals fund lost about 40 percent, according to an investor who asked not to be identified because the information is private.
Fund Redemptions
Funds of hedge funds in Europe may receive redemptions of up to 25 percent of assets by the end of the fourth quarter, said Aoifinn Devitt, founder of Clontarf Capital, a London-based investment consulting firm that tracks performance of about 20 commodity hedge funds. Funds of hedge funds are the largest investor group in the $1.9 trillion industry, according to Chicago-based Hedge Fund Research Inc. They account for about 42 percent of hedge-fund assets, or about $826 billion, according to HFR estimates through the end of June.
``It's difficult to be bullish on commodities,'' said Peter Rup, chief investment officer at New York-based Orion Capital Management LLC, which invests in hedge funds. ``I don't think you'll return to the highs of June or July. When the money is put back into the markets, it will find its way into equities not commodities.''
Oct. 6 (Bloomberg) -- Corporate short-term borrowing rates soared as bank bailouts spread through Europe and the Federal Reserve committed to doubling its auctions of cash to banks to as much as $900 billion to unfreeze short-term lending.
Yields on overnight U.S. commercial paper jumped 0.94 percentage point to 3.68 percent, according to data compiled by Bloomberg that stretch back to January 1996. That's the highest since Sept. 30, after the U.S. House of Representatives rejected a federal plan to rescue banks.
Borrowing costs are rising after European leaders meeting in Paris over the weekend pledged to bail out their own nations' banks, stopping short of a regional rescue. The Fed will increase its auctions under the 28-day and 84-day Term Auction Facility operations to $150 billion each. The two forward TAF auctions in November will be increased to $150 billion each, the Fed said.
``I'd love to see the Fed cut rates in addition to its actions today,'' said Tony Crescenzi, chief bond strategist and chairman of Miller Tabak Asset Management in New York, which manages almost $100 million of municipal securities.
Companies sell commercial paper, which matures in nine months or less, to help pay for day-to-day expenses such as payroll and rent.
The German government backed a 50 billion-euro ($68 billion) rescue package for property lender Hypo Real Estate Holding AG and U.K. Chancellor of the Exchequer Alistair Darling said Britain will ``do whatever it takes'' to help its banks.
Financial Paper
Commercial paper outstanding tumbled $94.9 billion, or 5.6 percent, to a seasonally adjusted three-year low of $1.6 trillion for the week ended Oct. 1, according to the Fed. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low.
Money-market funds are pulling back from investing in unsecured commercial paper from banks, JPMorgan Chase & Co. analysts led by Alex Roever in New York wrote in a report dated Oct. 3. High-grade non-financial corporate issuers are still able to roll their commercial paper, the analysts wrote.
The Fed will cut its key interest rate by at least half a percentage point at its Oct. 29 meeting, according to futures on the Chicago Board of Trade.
The futures show 54 percent odds of a 75-basis-point-cut in the 2 percent overnight rate, and a 46 percent chance for a half- point reduction. A basis point is 0.01 percentage point.
President George W. Bush signed the $700 billion bailout into law on Oct. 3, after the House approved the plan with a second vote.
Oct. 6 (Bloomberg) -- Stocks tumbled around the world, the euro fell the most against the yen since its debut and oil dropped below $90 a barrel as the yearlong credit market seizure caused bank bailouts to spread through Europe. Government bonds rallied.
The Standard & Poor's 500 Index retreated 5.4 percent, extending the worst weekly slump since 2001, as concern slower global growth will curb demand for commodities sent Marathon Oil Corp. and Freeport-McMoRan Copper & Gold Inc. down more than 7 percent. The MSCI Emerging Markets Index headed for its biggest loss in at least two decades and exchanges in Russia and Brazil were forced to halt trading. Europe's Dow Jones Stoxx 600 Index had its steepest intraday decline since 1987.
Today's plunge erased about $2.5 trillion from global equities after the German government was forced to bail out Hypo Real Estate Holding AG and investors disregarded the U.S. Treasury plan to revive credit markets. The euro weakened the most against the yen since 1999.
``It's like a fire,'' said Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris, which oversees the equivalent of $33 billion. ``It's easier to extinguish five minutes after the start. Now we're about an hour into it. We have to act quickly to assure the continuity of the financial system to avoid an irreversible contamination of the entire economy.''
BHP Billiton Ltd. slid 7.8 percent and UBS AG lost 10 percent as commodities producers and banks dropped the most in the MSCI World Index.
Seeking Safety
Investors seeking the safety of government bonds pushed yields on two-year Treasury notes to 1.5 percent, 50 basis points below the Federal Reserve's main interest rate.
The MSCI World lost 6.4 percent to 1,065.61 at 3:58 p.m. in London as all 10 industry groups decreased. National markets in China, Germany, France, Japan, South Korea and the U.K. fell more than 4 percent.
The Dow Jones Industrial Average dropped 4.7 percent, falling below 10,000 for the first time since October 2004.
The Fed said today it ``stands ready'' to foster ``liquid money market conditions.''
Europe's Stoxx 600 sank 7.4 percent, the biggest intraday decline since Oct. 20, 1987. BNP Paribas SA said it will take control of Fortis in Belgium and Luxembourg. Only four stocks in the index rose. The MSCI Asia Pacific Index lost 4.4 percent.
``We're seeing panic all over the markets right now,'' said Javier Barrio, head of equity sales for Spanish clients at Banco BPI SA in Madrid. ``Governments are taking steps to try to reduce investors' fears but confidence is weak.''
National Markets
National benchmark indexes sank in all 18 western European markets. France's CAC 40 slumped 5.8 percent, and the U.K.'s FTSE 100 decreased 5.1 percent. Germany's DAX fell 5.3 percent.
In Asia, Japan's Topix index lost 4.7 percent, and South Korea's Kospi slipped 4.3 percent. China's CSI 300 Index fell 5.1 percent, as trading resumed after a one-week holiday.
Indonesian stocks plunged the most since the 2002 Bali bombings and the rupiah and bonds dropped as investors exited commodities and emerging markets to limit losses in a global rout.
The MSCI Emerging Markets Index dropped 8.2 percent. Turkey's ISE National 100 Index sank 7.1 percent, while Saudi Arabia's Tadawul All-Share Index tumbled 9.8 percent.
Accelerating bailouts of financial companies and bank credit losses and writedowns approaching $600 billion has spurred the rout in global equities. The MSCI World is valued at 13.2 times the earnings of its companies, the lowest since at least 1995, according to data compiled by Bloomberg. Europe's Stoxx 600 trades at 10.4 times earnings, near the lowest since at least 2002, while the S&P 500 is valued at 20.9 times earnings.
`Challenged'
UBS, the European bank worst hit by credit crisis, lost 10 percent to 21.58 francs. The bank's earnings power may be ``challenged for some time,'' and UBS may write down $3.1 billion in the third quarter, Oppenheimer & Co. analyst Meredith Whitney wrote in a note to clients. The Swiss bank has posted $44 billion in losses, according to data compiled by Bloomberg.
Mitsubishi UFJ Financial Group Inc., Japan's largest bank, fell 9.2 percent to 806 yen. Mizuho Financial Group Inc. dropped 7.8 percent to 402,000 yen.
JPMorgan Chase & Co., the biggest U.S. bank by deposits, slid 5.7 percent to $43.29.
BNP Paribas dropped 2.6 percent to 69.495 euros. France's biggest bank agreed to take control of Fortis in Belgium and Luxembourg for 14.5 billion euros ($19.8 billion) after an earlier government rescue failed to ensure the company's stability.
Hypo Real Estate plunged 36 percent to 4.78 euros. The German government and the country's banks and insurers agreed on a 50 billion-euro rescue package for the commercial property lender after an earlier bailout faltered.
`Whatever It Takes'
German Chancellor Angela Merkel said the government will guarantee savings of private account holders to prevent a rush of withdrawals from the nation's banking system.
U.K. Chancellor of the Exchequer Alistair Darling said Britain is ``ready to do whatever it takes'' to help its banks, while Denmark said commercial lenders will provide as much as 35 billion kroner ($6.4 billion) over the next two years to a fund to insure depositors against losses.
U.S. President George W. Bush last week signed a $700 billion rescue package into law to stem a banking crisis that has claimed Bear Stearns Cos. and Lehman Brothers Holdings Inc.
The euro earlier reached $1.3540. It fell to 141.97 yen, the weakest since May 18, 2006, as investors cut holdings of higher-yielding currencies funded in the Japanese currency.
``The euro zone is the second domino of the globe to be falling over after the U.S.,'' said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland.
Money Market
The cost of borrowing in dollars overnight jumped, the British Bankers' Association said. Asian money-market rates stayed at the highest in more than nine months.
BHP Billiton, the world's largest mining company, sank 7.8 percent to 1,095 pence. Rio Tinto Group, the third-biggest, slipped 10 percent to 3,060 pence.
Freeport-McMoRan, world's largest publicly traded copper producer, lost $3.19 to $41.67.
Marathon Oil, the largest refiner in the U.S. Midwest, sank $3.83 to $31.75.
Royal Dutch Shell Plc, Europe's biggest oil company, dropped 5.4 percent to 1,540 pence. PT Bumi Resources, Indonesia's biggest power-station coal producer, tumbled 32 percent to 2,175 rupiah, extending a six-day, 19 percent slide.
Crude oil fell for a fourth day in New York, dropping as much as 5.3 percent to $88.89 a barrel. Power station coal prices at Australia's Newcastle port dropped 6.1 percent last week, a seventh decline. Copper declined 6.5 percent to $5,620 a metric ton on the London Metal Exchange.
UBS's Hong Kong-based economist Duncan Wooldridge reduced his growth forecast in Asia excluding Japan next year to 6.1 percent from 6.9 percent, saying the region will face ``recession-like conditions.''
Sunday, October 5, 2008
Latin America's economies
Keeping their fingers crossed
In Latin America, the most trenchant opponents of globalised finance look most likely to suffer at its hands
IF ANALOGIES with the Great Depression are scary for Americans, they are hardly less so for Latin Americans. Within a few years of the 1929 stockmarket crash, 16 governments in the region fell to military coups or takeovers by strongmen. In recent years the talk has mostly been of Latin America’s economic independence from its big neighbour in the north (with the exception of Mexico). But on September 29th, the day the House of Representatives in Washington balked at the bail-out, came a reminder of just how close those ties still are. While the Dow Jones dropped by nearly 7% in a day, Brazil’s Bovespa, the region’s biggest stockmarket, tumbled by more than 9%.
Even so, the fact that this financial crisis does not have “made in Latin America” stamped on it is cause for modest celebration. In the crises of 1994, 1998 and 2001 Latin America went on a binge, using foreign finance to pay for a huge rise in imports. The mood then changed, foreign money fled and panic ensued. This time many countries have had trade surpluses in recent years, and soaring commodity prices have made government finances look more than respectable (see chart).
Latin American banks also look strong. This is partly because they did not hoover up American mortgage-backed securities, but also because they are not that dependent on foreign credit. Brazil’s banks are an exception: the publicly traded small and medium-sized banks that do depend on foreign funding have had their share prices pummelled over the past week. But even in Brazil, foreign capital accounts for only about 10-20% of bank-funding needs.
Equity markets in Latin America are shallow (apart from in Brazil), which reduces the chances of one path of infection. Credit is more of a concern, particularly for exporters, who are finding foreign lines of credit much harder to acquire. This may be only a temporary blip. But if it endures, companies will turn to domestic lenders instead, leaving less credit to go around. Edmar Bacha of the Banco Itaú, who has seen many crises come and go, says a credit squeeze is now his chief concern.
A bigger future fear, though, is that a global slowdown accompanied by a decline in commodity prices will put government finances under pressure. Chile, which pours money into a big fund (currently around $20 billion) when copper prices are high, and bases its budget on a copper price far below the current spot price, is the only big country in the region where the commodity boom has not been accompanied by a government spending spree. Commodity prices have already fallen back a bit. If they fall much further some countries will be in trouble.
Heading the list of those most vulnerable are countries whose markets have been viewed for some time as badly behaved: Venezuela, Argentina and Ecuador. Venezuela, which has given up producing things that its consumers want, importing them instead on the back of its oil revenues, looks particularly exposed. The same oil revenue has allowed the number of public-sector jobs to more than double since President Hugo Chávez came to power in 1999, and is also underwriting a big new arms deal with Russia. Cutting public spending is an option, but not one which he would wish to contemplate before critical regional elections at the end of November. Even then it may not be easy to switch into austerity mode. Despite a recent increase in the arrests of “foreign imperialist plotters”, Mr Chávez would find it hard to explain away large numbers of people descending onto the streets.
If lower commodity prices lead to lower costs of staple foods, this would provide Argentinians with some relief against their country’s rampaging inflation. But for President Cristina Fernández’s government it would be a different story. It gets 10% of its revenue from export taxes. A fall in commodity prices would squeeze farmers (who already pay a 35% tax on exports) even more and might reignite their recent protests. Ms Fernández might be tempted to make up the shortfall by raiding pension funds. There is also a currency concern. The peso, which has won back trust after its crash in 2001, is backed by high soyabean prices. If these fall, it could lead to a fresh flight to dollars for those able to get them, and misery for everyone else.
For well-behaved countries, such as Mexico, Brazil, Colombia and Peru, things look better. Their governments have balanced their budgets and built up trade surpluses along with dollar reserves. In some places growth is still strong: the latest year-on-year figures show an 8.3% rise in Peru for July, and 6.1% rise in Brazil for the second quarter. Not everyone is convinced by this rosy picture. “Economists who talk about structural shifts on the eve of a cyclical downturn should all be taken outside and shot,” says Gray Newman of Morgan Stanley, a bank.
Meanwhile, Mexico’s age-old linkage to the United States’ economy is already having an effect. In August remittances from Mexicans working north of the border suffered their biggest drop on record. Hopes that Americans will keep buying heroic quantities of Mexican manufactured goods are dimming. And Mexico’s trade balance, boosted by high oil prices, is at risk. Brazil, Latin America’s biggest economy, looks better placed. But commodities account for about half its exports, leaving it, too, vulnerable to a fall in prices.
The biggest difference this time around, it seems, is that those countries that have been most hostile to global capitalism look the most exposed to its changed mood. In the 1930s, the region’s democracies suffered from a crash and a depression made thousands of miles away. Today, it is the elected monarchies ruled by economic populists who have the most to fear.
Oct. 6 (Bloomberg) -- U.S. stock-index futures dropped as Hypo Real Estate Holding AG required a rescue by the German government, deepening concern that credit-market losses will worsen a global economic slowdown.
Germany and the nation's banks and insurers agreed on a 50 billion euro ($68 billion) package for commercial property lender Hypo, which reported a 95 percent plunge in second-quarter profit because of debt-related writedowns. BNP Paribas SA, France's biggest lender, will pay 8.25 billion euros to purchase Fortis's Belgium bank after a government bailout failed.
Standard & Poor's 500 Index futures expiring in December fell 18.9 points, or 1.7 percent, to 1,089.4 at 11:07 a.m. in Tokyo. The benchmark index for U.S. stocks tumbled 9.4 percent last week, the steepest slump since the September 2001 terrorist attacks, as concern the U.S. is headed for a recession overshadowed passage of a $700 billion bank bailout.
``It will probably be a rough week for global investors as they realize the credit crisis has a long way to play out,'' said Frederic Dickson, who helps oversee $25 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``U.S. action was an absolutely essential first step, and global intervention is needed.''
U.S. gross domestic product will drop the next two quarters, with unemployment reaching 8 percent by the end of 2009, New York-based Goldman Sachs Group Inc. said in a research note Oct. 3. Financial futures are pricing in an 84 percent chance the Federal Reserve will cut the target rate for overnight loans between banks by 0.5 percentage point by its Oct. 29 meeting.
Housing Slump
The euro declined to $1.3648 at 9:45 a.m. in Tokyo from $1.3772 late in New York on Oct. 3. It earlier reached $1.3610, the lowest since Sept. 5, 2007.
Governments from Dublin to Moscow are racing to shore up Europe's faltering financial institutions as the global banking crisis widens. European leaders meeting in Paris this weekend pledged to bail out their own nations' banks, while stopping short of a regional rescue effort.
Germany's financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said in an e- mailed statement.
BNP Paribas will buy 75 percent of Fortis Bank Belgium from the government for 8.25 billion euros in stock, and purchase the Belgian insurance operations, Prime Minister Yves Leterme said.
Subprime Casualty
Fortis became a casualty of the global financial turmoil after pouring 24.2 billion euros into the acquisition of ABN Amro Holding NV assets last year just as the U.S. subprime-mortgage market collapsed and credit markets froze.
A report this week may show the number of Americans purchasing previously owned homes fell 1.1 percent in August, according to the median estimate of economists in a Bloomberg News survey.
About $20 trillion in value has been erased from stocks worldwide in the past year. The MSCI World Index of 23 developed countries lost 28 percent, the worst annual performance on record dating back to 1970. Investors in the U.S. face their first annual loss in six years after the S&P 500 dropped 30 percent from its October 2007 record.
The S&P 500, down 25 percent in 2008, still trades for 20.9 times profit from the past four quarters. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price- earnings ratio, according to data compiled by Bloomberg.
Profits among S&P 500 companies are forecast to slip 5.6 percent in the three months ended Sept. 30, the fifth straight quarterly decline, matching a streak ended in March 2002.
Financial shares in the S&P 500 declined the most this year, losing 35 percent, according to Bloomberg data. The bankruptcy of Lehman Brothers Holdings Inc. and government seizures of American International Group Inc., Fannie Mae and Freddie Mac extended financial companies' 21 percent drop in 2007, the biggest annual retreat since 1990.
Oct. 6 (Bloomberg) -- The global credit crunch deepened in Europe as government leaders pledged to bail out troubled banks and protect depositors.
BNP Paribas SA will take control of Fortis's units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a 50 billion euro ($68 billion) rescue package for Hypo Real Estate Holding AG. U.K. Chancellor of the Exchequer Alistair Darling said Britain is ``ready to do whatever it takes'' to help its banks.
The developments yesterday came a day after a summit in Paris where leaders of Europe's four biggest economies stopped short of a plan mirroring the $700 billion rescue in the U.S. to counter the worst financial crisis since World War II. Instead, they agreed to work together to limit the economic fallout, ease accounting rules, and seek tougher financial regulations.
``Until now the solutions have appeared to be uncoordinated, so perhaps it's time for a more coordinated approach globally,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. ``It's not just the U.S. and Europe, it's banks in every part of the world.''
French President Nicolas Sarkozy, who convened the Oct. 4 summit, called for a global summit ``as soon as possible'' to implement ``a real and complete reform of the international financial system.'' He said ``all actors'' must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.
`New World'
``We want a new world to come out of this,'' Sarkozy said. ``We want to set up the basis for a capitalism of entrepreneurs, not speculators.''
Finance ministers from the Group of Seven industrialized nations meet in Washington later this week.
German Chancellor Angela Merkel's opposition to collective action underscored the hurdles to a European front. ``Each country must take its responsibilities at a national level,'' she told a joint press conference after the summit.
Amid the race to shore up Europe's faltering financial institutions, Belgian Prime Minister Yves Leterme said late yesterday BNP Paribas will buy 75 percent of Fortis Bank Belgium for 8.25 billion euros in stock and purchase the company's Belgian insurance operations. France's biggest lender will also acquire 66 percent of Fortis's bank in Luxembourg.
BNP Paribas
The Belgian government will have an 11.7 percent stake in BNP Paribas, and Luxembourg a 1.1 percent holding, after the purchases are completed, BNP Paribas Chief Executive Officer Baudouin Prot estimated.
The sale of Fortis's units comes after a Sept. 28 bailout of the company, formerly Belgium's biggest financial-services provider, went awry. It received an 11.2 billion euro capital injection from Belgium, the Netherlands and Luxembourg last week.
Meanwhile, Hypo won a reprieve after Germany's finance ministry said the country's banks and insurers agreed to double a credit line for Hypo Real Estate to 30 billion euros. The federal government's guarantee for the credit line remains unchanged, , Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement.
Munich-based Hypo Real Estate had earlier announced that a government-backed 35 billion euro bailout plan collapsed after commercial banks withdrew their support.
Too Big to Fail
The government and the Bundesbank have said that Hypo Real Estate, the nation's second-biggest property lender, is too big to fail. Along with the bailout, Merkel said yesterday the government will guarantee savings by private account holders.
Until now, savings accounts, including those of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account's balance to a maximum of 20,000 euros, the group said.
In the U.K., Darling said the government, which took over Bradford & Bingley Plc last week, is ready to offer further support to banks that may get into financial difficulty, and he did not rule out a further injection of capital for failing institutions.
``We are ready to do whatever it takes, and that is, we've put money in to help banks generally,'' Darling told the British Broadcasting Corp.'s Sunday AM program. ``There are other measures we will be taking too, and I will announce them when we are ready to do that.''
Paris Summit
Darling's boss, Prime Minister Gordon Brown, was among the leaders gathered in Paris, along with Italian Prime Minister Silvio Berlusconi, Luxembourg Prime Minister Jean-Claude Juncker, European Commission President Jose Manuel Barroso and European Central Bank President Jean-Claude Trichet.
``The good news out of the Paris meeting is that the European heads of state now recognize the severity of this crisis,'' Goldman Sachs Group Inc. economists Natacha Valla and Erik Nielsen said in a note to investors. ``A pan-European approach would be much preferred, but given the urgency and complexities of organizing such measures between different fiscal regimes, national measures -- coordinated to the extent possible -- might still be good enough.''
Policy Recommendations
The leaders agreed on policy recommendations touching on regulation and accounting and said they'd press for looser enforcement of budget and competition rules at the EU level.
They said they would seek to harmonize guarantees of deposit levels. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,300) per account from 35,000 pounds to stem a flow of funds to Ireland after officials in Dublin guaranteed all debts and deposits of its banks.
Anticipating increased spending, declining tax revenue, and government bank takeovers, European leaders called for ``greater flexibility'' in the application of the EU budget ceiling.
European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dents tax receipts and boosts welfare payments.
The leaders said they want to allow banks to keep some assets valued as if they'd be held until maturity, instead of having to review their value each quarter.
They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down more than $580 billion since last year, according to data compiled by Bloomberg.
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