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Yesterday’s news, but this kind of response is indicative of fear of a very large problem in the immediate future.

And forcing banks to lend to entities they don’t consider credit worthy only shifts private sector losses to the banks.

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>   On Tue, Nov 4, 2008 at 7:38 AM, Dave wrote:
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France threatens to seize banks, German bail-outs escalate

By Ambrose Evans-Pritchard

The French state has threatened to seize control of the country’s banks and fire top staff unless they do their part to stabilise the economy by stepping up lending to companies in need.

“The banks have got to open up credit to business: they have the means to do it,” said prime minister Francois Fillon, accusing lenders of hoarding cash. “We don’t think the banks are stepping up to task as necessary. We can withdraw the credit that we have extended to them under the state’s contract with the banks, and that will put them in difficulty. At that moment the question arises whether we should take an equity stake, change their managers, and assume control over their strategy.”

Speaking on French television, he warned: “Broadly speaking, we’ll be able to judge over the next 10 days whether they are playing the game as they should, or not.”

Under last month’s rescue deal, banks agreed to raise lending to firms and households by 3pc to 4pc in exchange for a state injection of €10bn (£8bn) in fresh capital for the six largest banks, a modest sum compared to the bail-outs in Britain, Germany, Belgium and the Netherlands.

In Germany, HSH Nordbank – 59pc owned by the city of Hamburg and state of Schleswig-Holstein – rattled the markets yesterday by revealing that it would need €30bn in guarantees from Berlin’s €500bn stabilisation fund. It warned that further sums may be need`ed to meet capital adequacy ratios in the future.

“We are not under time pressure and will be holding in-depth discussions with our stockholders as to the strategy to pursue,” said Hans Berger, chief executive officer. The bank has had to write down €2.3bn over the last year, and suffered heavy losses from the collapse of Lehman Brothers.

Commerzbank said it would seek a combined guarantee and capital boost of €23bn, while BayernLB will seek €5.4bn. The giant property lender Hypo Real Estate is the biggest casualty so far, needing €50bn.

In Austria, a mini-crisis continued to simmer yesterday as the state stepped in “with a few hundred million” to rescue Kommunalkredit, after the public lender said it was suffering a “liqudity squeeze”. Austria’s banks have heavy exposure to the debt crisis in Ukraine, Hungary and the Balkans.

Europe’s banks are almost twice as leveraged as those in the US, according to the IMF. Many pursued a very aggressive lending strategy during the credit bubble. They account for the lion’s share of cross-border loans to Latin America, Asia and the entire $1.6 trillion pool of loans to Eastern Europe. Matt King, credit strategist at Citigroup, says they have waited too long to face up to their losses and will need to raise $400bn in fresh capital in a hostile global climate.


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13 Responses

  1. Ordinarily these actions or statements would have weighed on the euro, but the euro has remained firm. Forex participants now understand that the Fed will provide dollars to any European institution with dollar liabilities (through the ECB), rather than see asset sales and/or the purchase of dollars in the open market. Therefore, for now, further dollar appreciation appears to be a low probability or even out of the question.

    Down the road, however, it is possible that portfolio investors favor the dollar over the euro if they see U.S. conditions improving and Eurozone conditions worsening. However, it’s hard to assign a probability to that.

    The Fed has missed a golden opportunity to let the dollar appreciate, with little or no policy adjustment. It would have brought important benefits on the inflation front, in terms of trade to U.S. consumers, and with respect to the asset holdings of central banks around the world like China, that hold lots of dollar denominated assets.

    Instead, they put a cap on the dollar’s rise.

    Personally, I find this hard to understand. The benefits of letting the dollar rise because of a technical “condition” rather than having to implement a major policy shift seem to outweigh the risks. Perhaps they felt that asset sales by foreign institutions would have some contagion or systemic impact? But even that doesn’t make sense because if they’re worried about contagion and systemic impact, why did they let Lehman fail?

    I am baffled. Absolutely baffled.

  2. Yes, seems to support the thesis that the Fed wants a weak dollar to sustain US exports and restore our ‘national savings’- a gold standard term which of course is inapplicable with a floating fx.

    Today’s market action should spill over to the eurozone tomorrow and further challenge the solvency of their banking system and the solvency of the national govts that provide the deposit insurance.

  3. Guys, What would happen to the dollar if the european banking sector were to become insolvent? Would this usher in another deflationary wave?

  4. good question!

    probably bad for the euro, and prices would be a function of crude prices. seems the saudis/russians are in the process of resuming price hikes, but too soon to tell

  5. if they are trying to hike it doesn’t seem to be working as crude made a lower low today. perhaps the so-called de-leveraging trend that nobody can quantify is still going on.

  6. agreed, crude seems to be moving with the $, and hasn’t decisively decoupled yet.

    in the past announced opec cuts have coincided with higher prices, and last summers announced production increase coincided with the subsequent ‘make masters’ decline.

    time will tell, of course, and i don’t have any inside information regarding the inner discussions of the Saudis/Russian meetings recently held.

  7. If Isreal does indeed attack Iran, which seems likely, watch for crude to explode in price. Seems nobody is factoring that into the price equation of crude oil. Isreal is beating the war drum louder these last few weeks.

  8. “If Isreal does indeed attack Iran, which seems likely, watch for crude to explode in price.”

    How much influence does Israel have with the new white house elect folks? I am not liking what I am reading about this Rhammy guy the more I read about him, and I thought Rummy was bad! I think it is possible all this “reaching across the aisle” and “bipartisanship” he is selling is only because he looks to exploit both sides equally, maybe this can have good consequences in the future, maybe not, time will tell. If it is to exploit both sides to make a better future for science geeks like me, then the rise above partisanship can be good, if it is to advance jewish people and their religious views at the cost of my geek buddies then I don’t see it helping me in the future.

    The only jew I know is Sienfeld watching him on TV, once I met a few at the library and they wanted me to learn all about their customs and holidays but I told them I would rather go watch picard fight some borg then learn their customs. If I could just get those later day saint folks who keep knocking on my door every freaking day and waking me up after long nights posting on moslers blog I will be much happier. Warren do you have lots of reglious types in the USVI who come knocking on your door day after day wanting to covert you? That is going to be a key criteria to the next place I live – no one wanting to impose their rules of God on me 😉

  9. yes, we have all kinds of ‘missionaries’ believing they are sent down here by their god to help the less fortunate (by writing economics blogs…)

  10. Hoover,
    Used to live in Idaho amongst the LDS’ers. They are an odd lot and aggressively recruit. They are required to have 1 year supply of canned food so we’d get kids knocking on our doors all the time asking for xtra canned food. Not sure about it, but I heard they have some kind of under-ground bunker in Utah where they can ride out an apocalyptic event. Also, I have found some of them to be quite militant. So you’ve got the Jews, the Muslims, and now the LDS’ers, all of whom have their fanatic elements, as rapidly growing political, social, and economic forces. Seems like every LDS’s family I know of had at least three kids and many had 4,5,+6. YOu’ve got the europeans and the educated secular american middle class having fewer and fewer children cause its so expensive. Where does it leave us?

  11. “YOu’ve got the europeans and the educated secular american middle class having fewer and fewer children cause its so expensive. Where does it leave us?”

    At a reproductive deadend – the rich and educated always reproduce less all througout history right – something about climbing the social/economic ladder must make babies very negative. Don’t worry, Warren taught Sada to have lots of babies and put her career second 😉 I am sure she is willing to birth 8 kids and keep up with the mormons to keep the Mosler line going! The greatest economist had one commandment before all others – go forth and multiply! What did he know? I can’t wait till we have cloning and AI robots getting subsidized by the gubbment, we are gonna multiply like crazy then!! Trillions and Quadrillions of us will be smothering this solar system.

  12. Israeli monks beat each other senseless at the holy site of one of the biggest advocates for forgivenness and peace in the entire universe – Jesus’s tomb – I don’t get all this extreme violence that comes from worshipphing a man of peace – can’t we all just get along – how can these monks who have let hate in their heart make them punch another human being not feel an immense sense of shame they let thier silly emotions lead them into the path of the devil? How are they ever going to make peace with muslim allah worshippers when they can’t even be happy with each other?

    I was never taught as a child to believe in magic men and magic places so my youth was spared all that sillyness – I am sure the preachers that wanted me to attend their church were very upset I sat at home and read sci-fi books instead – those mormons woke me up again today – I didn’t even answer the door this time. Thier persistance will never overpower my awesome resistance.

    I don’t need a personal mission from god to want to make my fellow borg better and spread knowledge and understanding like some mosler type, my selfish economic interests of survival and prosperity is enough to motivate me to raise all the boats.

    Once one of my black brothers argued with me at the first KFC about the 13 secret ingredients and we decided to just have a bucket of chicken together and enjoy – Praise be to Colonel Sanders.

    http://news.yahoo.com/s/ap/20081109/ap_on_re_mi_ea/ml_israel_brawling_monks

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