Comments »PARIS — Since the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise.
Now the bill is coming due.
The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States.
Last week, Wall Street plunged after Moody’s Investors Service warned that Western banks that had recently beat a path to Eastern Europe’s doorstep now faced “hard landings,” spooking investors with new fears that the exposure could spread beyond Europe’s shores.
“There’s a domino effect,” said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”
The danger is on several fronts. The big European economies, including Britain, France, Germany and Spain, are already in recession, and many of their largest banks have curbed lending at home and abroad.
For Central and Eastern Europe, which enjoyed breakneck growth thanks to a wave of credit from these banks, the squeeze could not have come at a worse time. Already bruised by the global downturn, they are on the verge of a downward spiral as the flow of credit dries up. Average growth among countries in the region slid to 3.2 percent last year, from 5.4 percent in 2007. This year, it is forecast to contract by 0.4 percent — and very likely more.
“These numbers will be coming down,” said Charles Collyns, deputy director of the research department at the International Monetary Fund.
Add to that a new worry: International finance officials fret that the worst regional economic crisis since the Berlin Wall came down could set off a contagion among the region’s currencies, with echoes of the Asian financial crisis of the late 1990s. Then, emerging markets like Thailand borrowed in foreign currencies to fuel growth, but suddenly owed more than they could afford to pay back once their own currencies lost value.
Since peaking last summer, Poland’s currency has slumped 48 percent against the euro; Hungary’s has fallen 30 percent and the Czech Republic’s is off 21 percent. “Very simply, Eastern Europe has become Europe’s version of the subprime market,” said Robert Brusca of FAO Economics in New York.
On Monday, the central banks of Poland, Hungary, Romania and the Czech Republic sought to restore calm by issuing statements arguing that the recent sell-off was not justified by economic fundamentals.
In addition, Western banks could very likely suffer a further increase in nonperforming loans. “Most of the banks in this region are from the euro countries and will have to undergo further recapitalization,” Gillian Edgeworth, an economist with Deutsche Bank in London, said.
Another problem is that big institutional investors in Western Europe — banks, pension funds and insurance companies — have large holdings of East European debt. If the banks need further infusions of capital from Western governments already straining to pay for stimulus packages and to maintain their social safety nets, it could put additional pressure on the euro as well.
“The threat to more developed economies goes through the banking channel,” Dominique Strauss-Kahn, the head of the monetary fund, said in a recent interview.
As the downturn worsens across the Continent, Mr. Rogoff explained, risk aversion can quickly spread to other parts of the world. Some investors hurt by plunging markets in Europe are having to sell American assets to raise money, adding pressure to a United States stock market already weakened by fears of nationalization.
“It’s one big trans-Atlantic money market out there, and these banks lend money to each other all the time,” said Simon Johnson, another veteran of the monetary fund who is a now a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “Deutsche Bank and UBS and Goldman Sachs and Citi are all intertwined.”
In Eastern Europe itself, the risks for Western companies doing business there have also surged.
Until recently, for example, Eastern Europe and Russia were rare bright spots for the beleaguered American automakers Ford Motor and General Motors. In Poland, where G.M. has a major factory, sales rose 10 percent last year to 38,000 cars, while sales in Russia soared 30 percent to 338,000 vehicles.
Since then, demand has fallen sharply. In the Baltic countries, which were among the first to feel the chill, G.M.’s sales dropped an average of 57 percent in the final months of 2008.
Among the biggest victims of the crisis are tens of thousands of workers who had clawed their way to more prosperity, only to see their dreams crumble as jobs and the financial system eroded.
Because their declining currencies make it more expensive to import goods and to pay off foreign debts, governments have cut spending and reduced public services, leading to a wave of increasingly violent protests across the region that is threatening governments.
On Friday, the coalition government in Latvia — where the economy contracted more than 10 percent on an annualized basis last month — became the second European government, after that of Iceland, to collapse.
Meanwhile, in the Ukrainian capital, Kiev, demonstrators took to the streets Friday as depositors rushed to pull their money out of local banks.
The crisis has forced the monetary fund to step into the breach. In recent months, it has extended Ukraine, Iceland, Hungary and Latvia billions in aid. “I’m expecting a second wave of countries to knock at the door,” Mr. Strauss-Kahn said.
Two years ago, “the idea was very, very consistently projected that the I.M.F. would not have to help emerging countries any more,” and that the “financial markets would take care of it,” Jean-Claude Trichet, president of the European Central Bank, said Friday. Now, he said, this has proved to be “totally false.”
For Mr. Johnson and other students of financial history, the latest developments in Europe — especially in Austria, whose banking industry is heavily exposed to its Eastern neighbors — raise eerie parallels with the 1930s. Mr. Johnson notes that it was the failure of a Viennese bank, Creditanstalt, in 1931 that was a turning point in what became the Great Depression.
Mr. Johnson said he did not expect a repeat of that calamity, but he does foresee a long period of minimal growth, akin to Japan’s “lost decade” of the 1990s, in both the United States and Europe.
And while the United States may have been the trigger for this international financial crisis, it is hardly alone in shouldering the blame. “We set off the sticks of dynamite, but a lot of people had tinderboxes under their houses,” he said.
Joined Feb 3, 2009
1,759 Blog Posts
Just Thought You Should Know
Time to ‘Cover’ One of the
Biggest Trades of All Time
At the end of trading on Monday, Feb. 23, 2009, Robert Prechter closed the most successful trading recommendation of his 30-year career. His advice to “cover” the position came near the end of the trading day, when subscribers received the February 2009 issue of his Elliott Wave Theorist. This closed a “fully leveraged short position” he recommended to Theorist subscribers on July 17, 2007, when the S&P was at 1550. At the time of publication on Monday, Feb. 23, the S&P was trading below 750.
One measure of the value of this trade is the S&P mini futures contract, where each point is worth $50. A gain of 800 points on one contract equals $40,000; 10 contracts would be $400,000; 100 contracts $4 million. And so on.
A gain of 800 points in 19 months is a historical trade that, to our knowledge, has never happened before and might never happen again.
I took the liberty of looking at a S&P chart for you:
As you know C has been talking to the government.
Comments »The incoming chairman of Citigroup, Richard Parsons, showed up at the White House Monday, fueling talk that the federal government might take a massive ownership stake in the troubled banking behemoth.
Parsons’ appointment was to see Valerie Jarrett, one of President Barack Obama’s closest West Wing confidants.
Parsons got through the main gate a little before 6 p.m. A White House official confirmed the meeting but declined to offer details.
“He was here to meet with Valerie – something she often does with business leaders,” said the official.
News of Parsons’ White House visit started a buzz among financial services executives in Washington, where several said Monday night that they expected an announcement of a Citigroup deal as early as Tuesday. One executive told POLITICO that the White House is telling industry players that the Parsons visit is “a friendly meeting.”
The federal government is reportedly in talks to take as much as a 40 percent ownership stake in Citigroup, whose stock price has been battered by speculation that the government might seek to “nationalize” major banks to stabilize the financial services sector.
White House Press Secretary Robert Gibbs on Monday reiterated Obama’s belief in the importance of a privately held banking system – even as the Treasury Department signaled that it’s open to the kind of deal reportedly being discussed by Citi. A unusual joint statement by the Treasury Department, Federal Reserve and other regulators Monday also signaled the government’s willingness to do what’s needed to keep the nation’s banking system operating efficiently.
Parsons, the former head of Time Warner and one of the nation’s most prominent African-American businessmen, had been rumored as a possible pick for Commerce Secretary. But administration sources now say that job is likely to go to former Washington Gov. Gary Locke.
Asian Markets Tumble
Asian Regional Benchmark Hits 5 Year Low
Comments »Feb. 24 (Bloomberg) — Asian stocks fell, dragging the regional benchmark to the lowest in more than five years, as the global recession hurts company earnings and forces share sales to bolster balance sheets.
Nomura Holdings Inc., Japan’s largest brokerage, slumped 8.2 percent on concern a planned $3.1 billion stock sale will reduce the value of existing shareholdings. BHP Billiton Ltd., the world’s No. 1 mining company, retreated 2.1 percent in Sydney after crude oil dropped 4 percent. Suncorp-Metway Ltd., Australia’s third-largest general insurer, declined 5.4 percent after saying first-half profit tumbled 33 percent.
“The shoring up of banks, rate cuts and stimulus measures all take time to filter into the real economy and benefit listed companies,” said Paul Xiradis, who manages the equivalent of $8 billion as chief executive officer of Ausbil Dexia Ltd. in Sydney. “A degree of impatience has come into the market.”
The MSCI Asia Pacific Index fell 1.7 percent to 75.01 at 10:33 a.m. in Tokyo, set for its lowest close since Aug. 28, 2003. The MSCI World Index lost 0.4 percent, falling for the 11th consecutive day, during which the U.S. and Australia passed stimulus packages to bolster their economies.
Japan’s Nikkei 225 Stock Average lost 2.3 percent to 7,204.54. A close less than 7,162.90 today would be the lowest since October 1982. Australia’s S&P/ASX 200 Index fell 1.3 percent, set to close at its lowest level in five years.
Futures on the U.S. Standard & Poor’s 500 Index added 0.5 percent, following the benchmark index’s 3.5 percent slide to the lowest level since April 1997 yesterday. U.S. regulators said they will begin examining which banks have enough capital to survive a deeper recession.
Oil, Nomura
The MSCI Asia Pacific Index has lost 16 percent in 2009 as recessions in the world’s largest economies and a slowdown in China batter corporate earnings around the globe. Economists in a Bloomberg survey expect Hong Kong’s government to say tomorrow the city’s economy shrank in the fourth quarter by the most since the second quarter of 2003.
Editorial: The Arranged Marriage
HONG KONG: China has bought more than $1 trillion in American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home – a shift that could pose some challenges to the U.S. government in the near future but eventually may even produce salutary effects on the world economy.
At first glance, the declining Chinese appetite for U.S. debt – apparent in a series of hints from Chinese policy makers over the past two weeks, with official statistics due for release in the next few days – comes at an inopportune time. On Tuesday, the U.S. president-elect, Barack Obama, said Americans should get used to the prospect of “trillion-dollar deficits for years to come” as he seeks to finance an $800 billion economic stimulus package.
Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities.
But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows. Regulators have ordered banks to lend more money to small and midsize enterprises, many of which are struggling with slower exports, and Chinese bankers say they are being instructed to lend more to local governments to allow them to build new roads and other projects as part of the stimulus program.
“All the key drivers of China’s Treasury purchases are disappearing,” said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland. “There’s a waning appetite for dollars and a waning appetite for Treasuries. And that complicates the outlook for interest rates.”
Fitch Ratings, the credit rating agency, forecasts that China’s foreign reserves will increase by $177 billion this year – a large number, but down sharply from an estimated $415 billion last year.
In the United States, China’s voracious demand for American bonds has helped keep interest rates low for borrowers ranging from the government to home buyers. Reduced Chinese enthusiasm for buying those bonds takes away some of this dampening effect.
But with U.S. interest rates still at very low levels after recent cuts to stimulate the economy, it is quite cheap for the U.S. Treasury to raise capital now. And there seem to be no shortage of buyers for Treasury bonds and other debt instruments: Prices for U.S. debt have soared as yields have declined.
The long-term effects of this shift in capital flows – with China keeping more of its money home and the U.S. economy becoming less dependent on one lender – are unclear, but the phenomenon is something economists have said is long overdue.
What is clear is that the effect of the global downturn on China’s finances has been drastic. As recently as 2007, tax revenue soared 32 percent, as factories across China ran flat out. But by November, government revenue had actually dropped 3 percent from a year earlier. That prompted Finance Minister Xie Xuren to warn Monday that 2009 would be “a difficult fiscal year.”
A senior central bank official mentioned last month that China’s $1.9 trillion in foreign exchange reserves had actually begun to shrink. The reserves – mainly bonds issued by the U.S. Treasury and by Fannie Mae and Freddie Mac, the mortgage finance companies – had been rising quickly ever since the Asian financial crisis in 1998.
The strength of the dollar against the euro in the fourth quarter of last year contributed to slower growth in China’s foreign reserves, said Fan Gang, an academic adviser to China’s central bank, at a conference in Beijing on Tuesday. The central bank keeps track of the total value of its reserves in dollars and a weaker euro means that euro-denominated assets in those reserves are worth less in dollars, decreasing the total value of the reserves.
But the pace of China’s accumulation of reserves began slowing in the third quarter along with the slowing of the Chinese economy, and appears to reflect much broader shifts.
China manages its reserves with considerable secrecy, but economists believe about 70 percent is in dollar-denominated assets and most of the rest in euros. The country has bankrolled its huge reserves by effectively requiring its entire banking sector, which is state-controlled, to hand nearly one-fifth of its deposits over to the central bank. The central bank, in turn, has used the money to buy foreign bonds.
Comments »Now the central bank is rapidly reducing this requirement and pushing banks to lend more money instead.
At the same time, three new trends mean that fewer dollars are pouring into China – and as fewer dollars flow into China, the government has fewer dollars to buy American bonds and help finance the U.S. trade and budget deficits.
The first, little-noticed trend is that the monthly pace of foreign direct investment in China has fallen by more than a third since the summer. Multinational companies are hoarding their cash and cutting back on the construction of factories.
The second trend is that the combination of a housing bust and a two-thirds fall in the mainland Chinese stock markets over the past year has resulted in moves by many overseas investors – and even some Chinese – to get money quietly out of the country. They are doing so despite China’s fairly stringent currency controls, prompting the director of the State Administration of Foreign Exchange, Hu Xiaolian, to warn in a statement Tuesday of “abnormal” capital flows across China’s borders; she provided no statistics.
China’s most porous border in terms of money flows is with Hong Kong, a semi-autonomous Chinese territory that has its own internationally convertible currency. So much Chinese money has poured into Hong Kong and been converted into Hong Kong dollars that the territory has had to issue billions of dollars’ worth of extra currency in the past two months to meet the demand, shattering its previous records for such issuance.
A third trend that may further slow the flow of dollars into China is the reduction of its huge trade surpluses.
China’s trade surplus set another record in November, at $40.1 billion. But because prices of Chinese imports like oil are starting to recover while demand remains weak for Chinese exports like consumer electronics, most economists expect China to run trade surpluses closer to $30 billion a month.
That would give China a sizable sum to invest abroad. But it would be considerably less than $50 billion a month that it poured into international financial markets – mainly U.S. bond markets – during the first half of 2008.
“The pace of foreign currency flows into China has to slow,” and therefore the pace of China’s reinvestment of that currency in foreign bonds will also slow, said Dariusz Kowalczyk, the chief investment officer at SJS Markets, a Hong Kong securities firm.
For a combination of financial and political reasons, the decline in China’s purchases of dollar-denominated assets may be less steep than the overall decline in its purchases of foreign assets.
Many mainland Chinese companies are keeping more of their dollar revenues overseas instead of bringing them home and converting them into yuan for deposit in Chinese banks. In essence, they would not show up on the central bank’s books. So, overall Chinese demand for dollars would not be falling as much as the government’s demand for dollars, said Sherman Chan, an economist in the Sydney office of Moody’s Economy.com.
Treasury data from Washington suggest the Chinese government might be allocating a higher proportion of its foreign currency to the dollar in recent weeks and less to the euro. The data also suggest China is buying more Treasuries and fewer bonds from Fannie Mae or Freddie Mac.
Figures from the U.S. Federal Reserve and the Treasury point to a sharp increase in Chinese holdings of Treasury bonds in October. China passed Japan in September as the largest overseas holder of Treasuries, and took a commanding lead in October, with $652.9 billion compared to $585.5 billion for Japan.
But specialists in international money flows caution against relying too heavily on these statistics. They mostly count bonds that the Chinese government has bought directly, and exclude purchases made through banks in London and Hong Kong; with the financial crisis weakening many banks, the Chinese government has a strong incentive to buy more of its bonds directly.
The overall pace of foreign reserve accumulation in China seems to have slowed so much that even if all the remaining purchases were U.S. Treasuries, the Chinese government’s overall purchases of dollar-denominated assets will have fallen, economists said.
But China’s leadership is likely to avoid any complete halt to purchases of Treasuries for fear of looking like it is torpedoing the chances for a U.S. economic recovery at a vulnerable time, said Paul Tang, the chief economist at the Bank of East Asia here.
“This is a political decision,” he said. “This is not purely an investment decision.”
Allen Keyes You Tube Cast
[youtube:http://www.youtube.com/watch?v=aGNSyFpqpvE 450 300]
Comments »Boxcar Blues
Comments »NEW CASTLE, Ind. — Folks here figured the mile-long stretch of a hundred-plus yellow rail cars, which divides this small town like a graffiti-covered wall, would leave soon after it arrived.
That was a year ago.
“They stayed and they stayed and they stayed,” says Bruce Atkinson, a local resident. “Then more moved in.”
Tens of thousands of boxcars are sitting idle all over the country, parked indefinitely by railroads whose freight volumes have plummeted along with the economy. And residents of the communities stuck with these newly immobile objects, like the people of New Castle, are hopping mad about it.
Before February 2008, boxcars were a fleeting sight in this hamlet of 17,500 people 50 miles east of Indianapolis. For decades, no more than one or two trains a day traveled down the sleepy short-haul line that cuts through town.
Then rail cars — 20-foot-tall yellow behemoths covered with the sort of spray-painted artwork once associated with New York City subway cars — started rolling in by the dozens and grinding to a halt.
Now an elementary-school playground sits only feet from a line of rail cars covered with curse words. Someone with a paintball gun opened fire on one of the cars but missed, pelting a house instead. The looming cars have been blamed for casting shadows over homes that sit as close as 10 feet from the tracks. One woman says the lack of sunlight has turned her backyard into a mud pit.
