Wall Street fears for next Great Depression

[shortcircuit]

Source: UK Independent

Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn (£150bn) was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.
One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge when trading starts tomorrow."

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster." Mr Taylor, who had been relatively optimistic, has turned bearish: "It really does look as though the UK is now heading for a recession. The credit-crunch means that even if the Bank of England cuts rates again, the banks are in such a bad way they are unlikely to pass cuts on."

Mr Taylor added that he expects a sharp downturn in the real UK economy as the public and companies stop borrowing. "We have never seen anything like this before. This is new territory for us. Liquidity is being pumped into the system but the banks are not taking any notice. This is all about confidence. The more the central banks do, the more the banks seem to ignore what's going on."

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."

One of the problems facing the markets is that, despite the Fed's move last week to feed them another $200bn, the banks are still not lending to each other.

"This crisis is one of faith. We are going to see even more problems in the hedge funds as they face margin calls," said Mark O'Sullivan, director of dealing at Currencies Direct in London. "What we are waiting for now is for the Fed to cut interest rates again this week. But that's already been discounted by the market and is unlikely to help restore confidence."

Mr O'Sullivan added that the dollar's free-fall is set to continue and may need cuts in European interest rates to trim the euro's recent strength against the dollar. "But the ECB doesn't like cutting rates," he said.

On Europe, Mr Taylor said that while the German economy remains strong, others such as Italy's and Spain's are weakening. "You could see a scenario where the eurozone breaks up if economies continue to be so worried about inflation."

European financial markets were relatively unscathed by Wall Street's crisis but traders expect there to be a backlash when stock markets open tomorrow.

The Fed's plan will give 28 days of secured funding to Bear Stearns, which saw its value slashed over the week by more than a half to $3.7bn. JP Morgan will provide the funding, but the Fed will bear the risk if the loan is not repaid. Fed chairman, Ben Bernanke, who pumped $200bn of loans to cash-strapped institutions last week, said more would be available to help others in distress.

[shortcircuit]

Gulf central banks urged to sever links with tumbling US dollar

Published on Monday, March 17, 2008.





Source: Times Online - Sonia Verma in Doha

Pressure is mounting on central banks in the Gulf to fight surging inflation when they meet on Wednesday by severing the link between their currencies and the tumbling US dollar.
Officials in Qatar and the United Arab Emirates have denied rumours of an imminent decoupling, but investors are betting on reform and are rushing to buy local currencies as investment banks issue fresh calls for revaluation.

Analysts said that, despite the momentum, the Gulf states were unlikely to decouple suddenly from the dollar. They predicted more measured moves towards links to a basket of currencies.

“The feeling is [that] unilateral moves would only cause more confusion and difficulties for those countries who try to maintain the peg,” Jason Goff, head of group treasury and market sales at Emirates Bank, said. Mr Goff said that the Gulf states were more likely to move towards establishing a monetary union before they dropped the dollar. “I'm not holding my breath for a de-peg any time soon,” he said.

However, in a region where inflation has sent everything from the cost of food to construction supplies soaring, frustration is growing. In Qatar, inflation reached 12 per cent last year, the highest in the region, according to the International Monetary Fund. The UAE's inflation was 8 per cent. Some estimate that off-book inflation is as high as 40 per cent for some goods.

With central banks unable to lower interest rates to tackle inflation, the Gulf states are trying other measures. Qatar has frozen rents for two years and the UAE has announced price controls on basic foods and said that it would cancel customs levies on cement and steel imports.

Yet there is a consensus emerging that something more drastic needs to be done to achieve lower inflationary targets, such as the 5 per cent goal that the UAE announced last week.

“A revaluation is certainly required to ease inflationary pressures,” Zahed Chowdhury, head of Middle East research in Dubai for Deutsche Bank, said. The bank predicts that Qatar and the UAE will ditch their dollar pegs this year and track currency baskets, as Kuwait did last May. “The currency peg with the dollar worked well while both economies were moving in the same direction. Now, these two economic blocks are moving in completely opposite directions and it no longer makes sense,” Mr Chowdhury said.

Faced with rising construction and labour costs, Gulf corporations are leading the call for currency reform.

Business leaders complain of a looming labour shortage as companies struggle to lure foreign workers, and say that shortfalls of increasingly expensive European imports threaten the region's building boom.

Khalil Sholy, the president of Qatar's United Development Company, said that a year ago when he advertised for a mechanical engineer he would field more than 50 calls from qualified candidates around the world. Today, he is lucky to find one: “Now you receive nothing. Things have changed,” said Mr Sholy, whose company is constructing the Pearl Qatar, a 400-hectare man-made island, the gas-rich Gulf state's first international real estate venture. “Human resources are becoming scarce. Supplies are becoming scarce. De-pegging would help a great deal,” he said.

[shortcircuit]

Foreign investors veto Fed rescue

Published on Monday, March 17, 2008.





Source: UK Telegraph

As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Contagion fears sweep across the Atlantic
Dollar plunges as Fed steps up moves
Read more of Ambrose Evans-Pritchard
Desperate measures: Bernanke and the Federal Reserve need to keep on top of the crisis and continue to intervene if needed


Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.

It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.


Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.

With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.

Bear Stearns may be worse than LTCM collapse
Jeff Randall: A world addicted to easy credit must go cold turkey
How Bear Stearns ran out of the necessities
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."

Even monetary policy à l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.

"It is like fighting a virus with antibiotics," he said.

We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.

But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?

The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.

The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.

Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.

It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.

I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.

Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.

The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.

[shortcircuit]

Dollar's nosedive stirs joint intervention jitters

Published on Monday, March 17, 2008.





Source: Reuters - Satomi Noguchi

TOKYO - The dollar's sharp slide to 13-year lows against the yen and fresh all-time lows versus the euro on Monday is stoking jitters about the possibility of joint central bank intervention to prop up the dollar.
"The speed of the slide in the dollar/yen is so rapid that U.S. action alone can no longer stop the dollar's downward trend," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investment.

"The time is ripe for coordinated intervention by U.S., European and Japanese authorities."

Remarks on Monday by Japanese Finance Minister Fukushiro Nukaga also kept investors on their toes.

"We will cooperate with European and U.S. currency authorities and will monitor markets very carefully," Nukaga told reporters, adding that the latest moves in currency markets had been excessively volatile and that he would watch markets carefully.

Nukaga's comments gave a slight lift to the dollar, which last traded near 97 yen after earlier dropping by over 3 percent to a 13-year low of 95.77 yen on electronic trading platform EBS.

"His comments were different from usual so that led to some speculation about joint intervention," said Hiroshi Yoshida, a forex manager at Shinkin Central Bank.

Yoshida said, however, that while some traders thought coordinated intervention was a possibility, there weren't many who believed that the chances of such action were high.

The euro stood at $1.5843, after having trimmed some gains since earlier jumping 1.5 percent to $1.5905, the highest since the single European currency was launched in 1999.

The dollar plummeted against the yen and euro on investor fears that more financial institutions could become casualties in the widening U.S. financial crisis that led to JPMorgan Chase (JPM.N: Quote, Profile, Research) acquiring investment bank Bear Stearns (BSC.N: Quote, Profile, Research).

Shinkin Central Bank's Yoshida said that the impact of any intervention would likely increase if authorities were to buy dollars against both the yen and the euro.

Traders said the foreign exchange market was in a near state of panic, and some said coordinated dollar-buying intervention may conceivably happen as soon as markets in London open on Monday.

"Solo intervention by Japan seems difficult, but given this market turmoil, the US and Europe could move and conduct coordinated intervention in the currency market," said a senior options trader at a Japanese bank in Tokyo.

There was still some skepticism, however, about the likelihood for joint central bank intervention.

"The Fed's dollar position has been relaxed so far, and will most probably remain so," Benedikt Germanier, currency strategist at UBS said in a research note.

"Joint intervention seems also less likely as the ECB is busy managing inflation expectations," he said, adding that the last joint intervention had taken place in September 2000 to stem a decline in the euro.

In addition, Japanese authorities had "failed to draw a line in the sand", he said.

"The risk of an indifferent position will be a disorderly fall in the dollar accompanied by a further decline in U.S. equities and sharply rising yields. This would have very negative consequences on the real economy as well," Germanier added.

(Additional reporting by Rika Otsuka, Akiko Ishiwata and Eric Burroughs; Writing by Masayuki Kitano; Editing by Rodney Joyce, Gary Crosse)

[shortcircuit]

Banks face "new world order," consolidation: report

Published on Monday, March 17, 2008.





Source: Reuters - Walden Siew

NEW YORK - Financial firms face a "new world order" after a weekend fire sale of Bear Stearns and the Federal Reserve's first emergency weekend meeting since 1979, research firm CreditSights said in a report on Monday.
More industry consolidation and acquisitions may follow after JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) on Sunday said it was buying Bear Stearns (BSC.N: Quote, Profile, Research) for $236 million, or deep discount of $2 a share, a fraction of the $30 price on Friday and record share price of about $172 last year.

"Last evening the Bear Stearns situation reached a crescendo, as JPMorgan agreed to acquire the wounded broker for a token amount of $2 per share," CreditSights said. "The reality check is that there are many challenged major banks, brokers, thrifts, finance/mortgage companies, and only a handful of bonafide strong U.S. banks.

CreditSights said it lowered its broker, bank and finance company recommendations to "market weight" due to the credit crisis and stresses in the market.

In the event of future consolidation, potential acquirers identified by CreditSights include JPMorganChase, Wells Fargo, US Bancorp, Goldman Sachs and Bank of America (BAC.N: Quote, Profile, Research), once it works through its recent agreement to acquire Countrywide Financial Corp., (CFC.N: Quote, Profile, Research) the largest U.S. mortgage lender.

Possible foreign bank acquirers include HSBC, Barclays and Canadian firms, said CreditSights, which said the Bear Stearns deal should be good for bondholders.

"The debt side whether at the parent level or on the broker/dealer levels seems to be in rather good shape with the capital structure to be assumed by JPMorgan at deal close," which is expected in about 90 days, CreditSights said.

Financial stocks are likely to trade lower but the overall market may begin to stabilize, according to Morgan Stanley's chief U.S. credit analyst.

"I view the stabilization of Bear Stearns coupled with the liquidity action by the Fed as constructive for the proper functioning of the lending system," said Gregory Peters, chief U.S. credit analyst at Morgan Stanley. "Financial stocks will trade lower, but these are important steps in the path of trying to stabilize the credit markets."

Global stocks fell sharply on Monday, and U.S financial stocks tumbled in early trading, led by a 89 percent slump in Bear Stearns. Lehman Brothers (LEH.N: Quote, Profile, Research) shares sank more than 35 percent.

The cost of protecting Lehman Brothers debt with credit default swaps widened by 40 basis points to 490 basis points, or $490,000 a year for five years to protect $10 million of debt, according to data from Phoenix Partners Group.

Bear Stearns' credit default swaps narrowed by 380 basis points to 350 basis points, while JP Morgan's swaps widened by 25 basis points to 215 basis points, according to Phoenix Partners.