Auditors worried about litigation over the financial meltdown

Most of us feel that auditors should indeed be worried now. After all, none seem to have been raising any alarms over the extent of bad loans accumulated by major financial institutions, or over risks that banks exposed themselves to through entering into derivatives contracts they claimed they understood but did not. And now many hold auditors at least partially responsible for the ensuing debacle.

For some audit firms, the time of reckoning seems to be approaching fast. However the degree of their concern over legal action will depend on where the firms are operating, and global or US-based firms are at greatest risk of coming under close scrutiny in the courts of law.

Time to clean out the Augean stables of wasteful spending

When will this government at last start cutting its wasteful spending, the money it has been squandering for years, and money that – surely – it is now seeing it cannot afford to throw around any longer?

We are now finally hearing admissions about the mammoth scale of government debt UK’s accumulated over the recent years and especially in the aftermath of the financial sector fiasco, and that Britain will be saddled with this debt for 20 years or more. Debt that both us and the next generation will have to shoulder and pay for through higher taxes whilst the government is stuggling to balance its books and finds that its income is lower than its expenditure. None of these forecasts make pretty reading, but let’s face it, we were all aware something of this magnitude was about to start unfolding.

Russia at risk of government debt default

A serious financial crisis is continuing to unfold in Russia.

Capital outflow: In the last few weeks, foreign investors withdrew their money out of Eastern Europe, the Russian stock market has fallen over 60%, and the government has been on a spending spree trying to prop up the collapsing markets. The very small rally Russian markets have experienced in the last 5 days are rumoured to be due purely to government’s share-buying activities.

As I wrote recently, the government committed a package of $120bn (and some sources say, $200bn) to bail out struggling large Russian banks – against the backdrop of some bank runs and bankrupcies of the smaller players.

Oil price collapse: Coupled with the above, the price of oil has recently fallen back beyond the $70 per barrel, now standing at about $67. Russia needs the oil price to be above $70 to break even and balance its national budgets (compare this to $95 for Iran and and Venezuela, and $50 for Saudi Arabia. Source – NY Times).

So, as Russia makes less and less money through its oil exports and wasting ever-increasing sums of money on propping its markets, where does this leave it?

Debt overload: Predictably, not in a very good position. Russia has accumulated a lot of foreign loans and in the next couple of months, needs to roll over $47bn of them. As there are very few investors left wishing to extend their support to struggling economies, this task will be exceedingly challenging. In total, Russia has $530bn worth of foreign debts, clocked up during the recent years of massive market expansion and over-confidence. Of these, another $150bn are falling due to be refinanced in 2009.

On track for downgrading: S&P issued a warning that it might downgrade Russian government bonds reflecting the declining credit-worthiness of the state. However presently, it maintains a credit rating of BBB+, the third lowest investment grade. If Russian bonds are downgraded further, this means they will lose their investment grade status, and any further credit to the country will cost it even more.

Moody’s downgraded the Russian financial outlook from “stable” to “negative” in the last week, citing “slowing asset growth, higher inflation, the slump in equities and funds leaving the country, all of which could result in deteriorating fundamentals for banks” as reason for its decision.

Credit default swaps, which are being taken out as means of insuring investors against (in this case) Russian government bankruptcy, are reflecting this in their pricing. CDS spreads (the difference between the buy and sell quotes), which serve as a measure of risk tolerance, are widening massively, reaching a 1,123, which is higher than spreads on Iceland’s debt before it sought a rescue from the International Monetary Fund, reports the Telegraph.

Russian government heading for bankruptcy? Thus the creditworthiness of the Russian state is in itself in question. It may be that the Russian government is heading for a default on its foreign debt, as it did fairly recently in 1998 – although the situation in 1998 and 2008 is somewhat different.

 

Copyright 2008 by CuriouslyInspired

What the UK government knew about the approaching Icelandic bank crisis

Here is something that did not surprise me at all today.

The UK government, it appears, knew perfectly well that the Icelandic banking system was heading for a meltdown – as recently as March 08. But it did nothing to help out some of the UK savers.

Back then, the Icelandic government was seeking help for its banking system as the confidence was starting to collapse and it needed money. Mervyn King, the governor of the Bank of England, commissioned several reports to assess the state of the Icelandic banking sector, and refused to help out when the results that came back were – predictably – not very reassuring.

Failure to act: Discussions earlier on in 2008 on the possibility of turning UK operations of Landbanksi, the now-collapsed bank, into a UK subsidiary, did not reach any conclusions. This means that whilst the UK government was aware of the impending danger to Landbankski’s UK savers, it failed to negotiate a status change for this branch which would have meant savers would have been covered by the UK deposit protection scheme when the collapse inevitably happened. It failed to act to aleviate the inevitable fallout.

Liberal Democrat treasury Vince Cable is now calling for an inquiry to understand the extent of UK government’s knowledge about the forthcoming crisis.

The government has recently confirmed that it will back private investors’ money, but this leaves charities and local councils at risk of losing all their money.

The savings debacle: Now, a huge amount of charities and public sector bodies have their money locked in collapsed Icelandic banks. Here is the quick list of councils that caught out in the meltdown.

Some councils have been warned: It appears that many did have a prior warning about the impending danger. Landsbanki, Glitnir and Kaupthing bank were all downgraded in Feb – March 2008 by credit rating agencies. The confidential advice to move savings elsewhere was passed to many councils by their advisor, Sector Treasury Services.

Some acted on this advice and moved the investments; some could not, as money was locked in long term deposits. Others – and this is the shocking bit – continued ignoring financial advice and even increased deposits made. This, unfortunately, just confirms some council’s incompetence in financial management.

Read more details here.

So, tell me something I did not know? The UK government that is wilfully closing its eyes to the inevitable and refusing to act early, and UK councils that do not competently manage their money. What a shambles.

 

Copyright 2008 by CuriouslyInspired

Russian banking situation deteriorates sharply

As the global credit crunch and deterioration of confidence is starting to bite Russia harder, Russian banks are experiencing panic deposit withdrawals. Add to this the rapidly falling stock markets – and you have a dangerous cocktail of financial instability.

Customers want their money back: Last week, Russian bank Globex banned depositors from taking their money after a run on its deposits sparked by crumbling confidence. It is the first bank to suffer this problem in 2008 – but undoubtedly not the last. A number of other banks also experienced an unexpected rise in people withdrawing their money and closing their accounts. Long queues of investors desperate to have their cash back are starting to form outside smaller banks. Many failed to get their money as bank operations were suspended. So this crisis is not doing anything for the average consumer who is now seriously worried about losing their hard-earned money.

In the last couple of months, three banks have been forced into mergers because of the liquidity crisis brought on by the global credit crunch. There is anecdotal evidence that banks are being bought for nominal sums, one of them quoted to have been sold for $5,000.

Bailout Russian style: The Russian government’s financial bailout package of $120bn is aimed primarily at large captive state-controlled institutions such as Vneshtorgbank (VTB – the Bank for Foreign trade) and Sberbank (the Savings bank). The government also intended to spend a portion of it on shares purchase to support the tumbling stock market, but not so much at lending activities. Overall however, there seemed to be insufficient detail and transparency about the total package which caused the market a lot of concern.

The package itself is an astronomic size of money in terms of its size relative to Russia’s GDP. For comparison, US’s $700bn bailout is around 5.5% of its GDP (US GDP is approx $14trillion), whereas Russia’s bailout is about 10% of its GDP (Russia’s GDP is approx $1.2trillion). Since the bailout has been announced in September, it has had little impact on the Russian stock market, which fell down around 60% from its high in May 2008.

The crash of Russian stock market has been the most dramatic event of all the world’s stock markets collapses in 2008.

Market correction: In itself, the Russian crash is a huge adjustment back to the shaky economic fundamentals. Russian economy is still set to grow by about 7% in 2008 according to the IMF. However, the foreign investors who were attracted by speculative expectations of high returns in Russia are all gone and the money is gone with them, making the huge market bubble go “pop” spectacularly quickly.

Financial outlook: This is tricky as there are a few moving parts. Oil is a key one, but I am not going to touch upon it today, only noting that a fall in world oil prices is causing major concern to Russia. 

From the point of view of banking, we are seeing the start of consolidation of the Russian banking sphere, and there is a fear, which the government will strongly deny, that the financial situation is pretty grim: the major concern is that widespread bank failures will spark panic. Still, the population is pretty pleased about one thing – that a bunch of super-rich Russian oligarchs will lose their ill-gotten money in the stock market crash. That’s some consolation, isn’t it?

 
Copyright 2008 by CuriouslyInspired

On Pakistan in financial crisis

The global financial crisis is threatening to engulf yet another state. This time we are talking about Pakistan.

Background: It’s a very different story from Iceland – and has a heavy political spin to it. Pakistan has had 9 years of military rule headed by Pervez Musharraf. He recently stepped down to avoid being impeached. Pakistan’s new civilian government is just 5 months old and is now headed by the widower of Benazir Bhutto, Asif Ali Zardari.

The challenge the new government faces is dealing with the aftermath of Pervez Musharraf’s outdated economic and security policies, and changing these policies to rescue the country from its current brink of default.

During Musharraf’s rule, Pakistan has been propped by aid from the USA. Now these loans have stopped, the country started rapidly running out of money.

As Reuters reports, “Pakistan has been running unsustainable fiscal and balance of payments deficits”. In the last few months, Pakistan’s foreign currency reserves have fallen sharply to just under $9bn (compared to $16bn in Nov 07), as the country is spending a lot of money on importing increasinly expensive oil, whilst also maintaining a large army and supporting programmes to fight militant extremists.

Impact of the crisis: As the result, Pakistan’s currency rupee has dropped in value by 19% in 2008. The country’s stock index the KSE (Karachi Stock Exchange) has slumped 41% from the April’s peak.

The inflation is running at 25%, and although the government has stated that it will aim to cut central bank’s borrowing, tightening the monetary policy, there is fear that heavy government borrowing (a much looser fiscal policy) will actually fuel inflation further.

Security fears: Pakistan’s people are living in poverty and many cannot now afford fuel and food staples. There have been protests where people expressed their anger at the situation. Strong popular discontent is fuelling support for militant extremist groups. This creates a big problem for the new government as it has vowed to deal with militant groups near the Afgan border. Pakistan have a large army to support at present, and lack of money will make it difficult to finance existing planned programmes.

Trouble is near: It is forecast that if the country carries on as is, it will need $10bn to prevent going bankrupt in February 2009. Government bonds traded internationally have already dropped down in value implying the market fears the government will default upon its debt.

Whilst the government has been denying it is facing a crisis of balance of payments, it has been reaching out to China for a large loan instead of the IMF.  

China is set to benefit: China presently has $2 trillion in foreign exchange reserves, and although it cannot be seen as totally immune from the ravages of the global financial crisis, it certainly seems well insulated at present. In fact, China might do quite well out of the Global meltdown, strenghening ties with other countries in trouble and acquiring new allies. Its prospects are presently far better than for many other states. Watch this space – China is set to grow and grow and grow…

 

Copyright 2008 by CuriouslyInspired