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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

The euphoria of earlier this week, which followed an announcement of the UK bailout by Gordon Brown, has seemingly finished – as it was feared to. Shares have yet again collapsed. Asia showed probably the worst results today, with the Nikkei dropping 11% on the 16th October. As I am writing this, the FTSE has fallen below 4,000 again. And Dow will be perilously close to its 8,000 mark.

Shifting sands: Investor sentiment, similar to voter sentiment, is a funny thing. Markets are driven by it, same as elections are won on the strength of popular feeling. However stock market sentiment is also fickle and impermanent, and prone to wild swings especially in troubled times such as now. We are nowhere close to being out of the woods yet. In the weeks to come, there will be significant market volatility, and the market will trend downwards. Perhaps my fears of FTSE at 3,000 have yet to be realised.

Credit crunch biting hard: Interbank lending is still pretty frozen, although short term rates have fallen a little – with banks still not keen to do any longer term lending. Despite all government intentions and declarations, banks cannot be forced to start lending against their will if they do not have confidence in their financial partners. Somebody compared this to “asking water to flow upstream” – just is not going to happen. The impact of this has already spilt out into the real economy: businesses are finding it very hard to refinance their existing loans. This will have a negative impact on the whole economy, reducing business activity and forcing some to cease trading altogether.

Recession: What is driving the stock markets plunges at this very moment are investors realising that we are heading full steam into a global recession – and the existing bailout funds will not be enough to prevent it. A lot of government money is being pumped into the banking system – yet as long as investors think we are heading for a recession, they will keep on selling, and the money will keep on burning up and vanishing into the bottomless pit. It’s a vicious circle which under the current financial system, only restored consumer confidence can stop – and we just are not getting any positive economic news for this to happen. Read the rest of this entry »

It’s fascinating to see how much everyone around the globe is presently applauding Gordon Brown, the UK’s PM, for coming up with “the plan” to rescue us from the economic meltdown. Features of this plan are now being adopted by other governments in need of a magic wand to get them out of the financial abyss.

UK plans: The plan amounts to the UK Government formally taking a stake in UK’s banks whilst giving them money (£37bn to three named banks – RBS, Lloyds and HBOS) to recapitalise and hence become more resistant to the current market volatility and the ongoing liquidity crisis.

This was received exceptionally well by the world’s markets. FTSE 100 is positively rocketing upwards – on Friday it closed below 3,900, it now stands at 4,400, up well over 12% in just 2 nerve-wracking days. European and Asian indices are also up very strongly.

US adjust the approach: US’s bailout package of $700bn, which was originally intended just to buy off bad debts off failed banks, was badly received by the markets earlier in October and failed to stem the fall of american indices which dragged the world’s markets down with it. Now the US government is turning towards the UK-style idea and is planning to recapitalise 9 banks (amongst them Goldmans and Morgan Stanley) using $250bn of the bailout pack for this.

This will be deeply humiliating to Goldmans and Morgan Stanley which until now have been the last 2 “pure” investment banks left on Wall Street. Goldmans, in particular, was initially trying to raise its own capital to ensure its survival, whilst Morgan Stanley was looking for a merger. I wrote about that earlier in Sept.

US markets strongly welcomed US’s change in thinking on the rescue plan and Dow Jones is finally on the up.

Knight in shining armour? Gordon Brown is getting credited for coming up with the plan that is going to work, where all else failed to date. Paul Krugman who got awarded the Nobel prize for economics, has been praizing Mr Brown as the one who might have saved the world’s financial system: more details here.

But we must not forget, before we get carried away on the sudden euphoric wave, that:

  • Gordon Brown failed to prevent UK entering the credit spending spree in the first place, creating conditions for a very sharp comedown to earth which are only starting to bite now
  • He failed to get the regulators involved when alarm bells have been ringing for months as banks were increasingly entrenched in runaway activities which were hardly regulated

And thus we must consider Gordon Brown’s achievements and undoubted strong leadership skills in the last few days in light of the fact that really, we should not have been here in the first place.

What is always impressive is the well-oiled Labour spin machine which helps Mr Brown deliver his recent “save the banking world” speeches so very well. UK is newly rebranded as “rock of stability and fairness”. The stuff that would normally make one cringe was swallowed by this week’s hungry for reassurance markets, hook line and sinker.

A very bitter pill: As for the bailout itself –  no-one likes the sound of it. In fact we all loathe the sound of it. And I for one thought in the last month, just let these banks fail, as “damned if you do, damned if you don’t” – bailout or not bailout – it will hurt in both cases. But economic tools and alternatives being rather thin on the ground, I agree with some of my recent commentators, I have come round to semi-accepting the inevitability of this bailout. This is mainly because everything else I have seen suggested would have implied an HUGE social and economic upheaval. Like write off everyone’s debt and assets, for instance.

What this means is that as the world’s order is shifting towards quasi-socialist principles and a very strong government hand in regulation, we are not trying to shake the foundations of the existing society. Call me a coward but I don’t feel there is a call for that at this stage.

Yet from the UK’s point of view, it is extremely disappointing to see Gordon Brown take so much credit for an event that he did not manage to prevent.

 

Copyright 2008 by CuriouslyInspired

I don’t have any answers. And today, I feel the weight of fear and uncertainty over the impact of the Global Meltdown on people closest to me. The government measures do not seem to be working to stop the systemic panic that has taken hold of everyone. Markets are in freefall across the globe.

Lehman’s CDS settlement: Part of the reason’s for today stock market crash is the fear surrounding the need to settle Credit Default swap (CDS) protection on Lehman Brothers’ debt. This is due to happen today. The size of financial contracts under settlement is $400bn.

CDSs are a type of financial insurance policy (loosely speaking) written by a financial institution to protect the holder against the risk of a specified party (in this case, Lehman Brothers) going bust. Now that Lehmans is bankrupt, the holder will want this policy paying out. If the payout does not happen, the holder of the policy is at massive risk as it does not get the money it was counting on. The payout might also not happen if the writers of the policy do not have enough cash to pay all obligations. If things go sour, this will impact banks which have so far not been in the spotlight being the writers of these contracts, or the holders of these contracts – such as JPMorganChase.

There is uncertainty that this settlement can take place today, given the state of world’s markets and absence of liquidity. If it goes wrong, this might kick off a further chain reaction of negative events. 

Gloomy thoughts of the day: Going back to the economy, here is what I fear might happen – and I do feel quite negative today – we can check how close or far off the mark I was later this year:

  • Lower limit of indices: Only 2 days ago I speculated (at home) that FTSE 100 will stop before crashing through the 4000 psychological barrier. This has already taken place – it’s trading below 4000 – so the reality is worse than my fears. So should FTSE 1000 at 3000 be the limit?
  • Markets shut down for weeks: We have already seen Iceland and Russian markets closed. Will US and UK and other major stock markets follow suit in an effort to curb panic?
  • Sweeping reforms: There might be major reforms taking place in the economy and finance. I cannot discount the possibility of drastic steps such as freezing all savings as reforms are carried out. Your money might not be safe wherever it’s held. Our Governments have guaranteed savings so far – but will they be able to stand by that guarantee? I fear they could abandon it if they really had to.
  • Pensions and Investments: Any stock-market reliant savings held in funds, have already lost a massive chunk of their value. My own savings held in funds are down 25%. People close to retirement are going to struggle to live on what is left. Savings are not safe wherever they are. If there is something akin to a currency reform, then all savings can be taken away anyway as part of that. How much faith do we have in the Government’s guarantee on existing deposits? I would not trust it 100%.
  • More bank failures: I am sure we’ll see a few more of these, causing problems with existing savings lost or frozen
  • Recession: Fears deepen about entering a major recession akin to the Great Depression of the 1930ies. The IMF is speculating this might last until the end of 2009. Could it be longer? Could it be years of hardship for people who worked for decades on end to secure their future?
  • People take to the streets: Wouldn’t you – if things got very bad? It’s the likes of you and I who can topple governments, if we are truly p*ssed off.

Because at this stage, no-one seems to really know what to do next.

 

Copyright 2008 by CuriouslyInspired

This was bound to happen sooner or later. What has been a scary but fairly theoretical event of “stock market meltdown” and of “credit markets seizing up”, has to impact us all to some extent.

Luckily we did not have any savings in the Icesave, the troubled UK savings branch of an Icelandic bank which froze UK savings yesterday. A friend of ours did – and now they are stuck with no ready cash until who knows when. Ouch.

Mortgage: But we do have a mortgage and savings – ours are in an “offset mortgate” account with a UK bank. For those not sure what that is, it’s an account which pools together your mortgage debt and savings, so you only pay interest on the net amount. In the long run, it actually saves money on your mortgage borrowing and allows one to repay the mortgage early as long as you have a little bit of savings to offset against your debt.

Yesterday, we were getting quite worried about the further slump in UK equity markets. What if our mortgage provider goes bust too? Can they then take our savings, but leave us with a mortgage liability? I think this would make for an interesting court case. This probably has not been tried yet and I have no intention of becoming the first person to go through this.

Keep your savings safe: We decided to play it safe. Rather than risk leaving our savings to the mercy of crazed markets which can bankrupt any bank at present, we chose to repay some of our mortgage earlier than planned. I’d rather reduce the outstanding debt and have less money for now, than risk of losing the money completely. Not entirely happy about this situation but in the current situation, probably the best option.

Time to invest? I also still think now is the time to buy into FTSE as it’s so low. We bought a bit yesterday before midday. Given the UK Bailout package annouced this morning, the shares seem to be rebounding again, but if this slumps further and I feel brave, I’d probably buy a bit more. In 2 years’ time this might be seen as a shrewd move – I hope…

The main Russian stock exchanges have been shut down for large parts of Tuesday, as the BBC reports. Yesterday Russian stocks lost around 20% on the RTS and Micex exchanges. Newest legislation passed by the Russian government now dictates that if stock market changes during the day by more than 5%, or by over 10% at market open, trading will be suspended. There used to be a higher threshold of suspending trading.

A Russian Bailout: The Russian president has now annouced that Russia is going to offer a bailout package of $36bn to the largest banks of the country. Unsurprisingly, the largest banks are in trouble.

Why is this necessary? There is rife speculation about why Russia needs to close its stockmarkets during volatile periods. Some see it as typical heavy-handed intervention and meddling – a sign that an incompetent government does not trust its own stock markets to sort itself out. I might have held this view myself 2 weeks ago when this first started happening. However today we see that stock markets around the globe cannot be relied upon due to the totality of the global meltdown. So perhaps the Russians’ response is not so outlandish after all.

Another view was that the Russian government was going to use the markets downtime to find money to buy up troubled firms after the exchanges’ reopening. Critical as one might have been of this intent before, we now see that governments across the world are nationalising all matter of banks in a hurry.

A likely intent is to try and calm investors’ panic. It’s not likely to work with bad news coming out left right and centre at the moment.

Total meltdown: The RTS index has slid by 65% from its high in May 08. This has been the largest fall amongst all of the world’s stockmarkets. This has demonstrated amply that the Russian stock market was just one huge bubble waiting to burst – the economy is in disarray. Some analysts say that Russian “internal factors” (war with Georgia, government’s short-termism and incompetence, falling production of gas, underinvestment into industries to name but a few) are at least 50% to blame for the current collapse.

Carried away: The Russian crisis has been coming for a long time. And same as with all other investors around the globe, no-one expected that the good times would actually end. The point I want to make is that with Russia, the economy was always less sound compared to… well, almost everyone else. And arguably, Russians got carried away with their illusory wealth more than the rest of the world did. Which will make their landing down to earth possibly even harder.

 

Copyright 2008 by CuriouslyInspired.

Yesterday was a very, very bad day on European stock exchanges, with key indices sliding down massively. To give some examples – UK’s FTSE 100 down 7.8% (the largest fall since 1987’s crisis), France’s CAC 40 down 9%, Germany’s DAX down over 7%, Russia’s RTS down over 19% resulting in Russian stock markets being shut down today again. Asian markets were also sharply down. There are more market casualties – Fortis (a Dutch-Belgian bank) and Hypo Real Estate (a German bank) – and seeking urgent rescue either through cash injections or a quick merger.

Iceland continues to struggle under the weight of its massive banking crisis, trying to avoid national bankruptcy, with the second largest bank Landsbanki now being nationalised – this is in addition to Glitnir about which I wrote recently. Thus, this week the US economic calamities have been demonstrated to well and truly impact global markets – not that we have doubted this earlier.

Cause of the panic: The European stock market slide is attributed to the lack of a coordinated economic front amongst EU’s governments which does nothing to restore confidence in the system at the time when emerging economic data is implying that US is entering a recession. US’s recession will impact the world’s economy due to its global nature. European governments are pursuing their goals in isolation and cannot have seen the depth of the crisis we are about to enter. According to this article, we are staring into the abyss of a systemic collapse, with markets at risk of closure. One recommendation is for the European central bank to lower its interest rate immediately and start acting like the lender of last resort to companies in trouble. Lowering the rate of interest should kick off inflation, one side effect of which will be to reduce the real value of outstanding debt, making debt obligations easier to bear.

UK is also showing deteriorating economic figures, prompting statements that it too is now technically in recession. Meanwhile, European countries are introducing their own measures to address the credit crisis and resulting stock market plunges, but there is no overall agreed policy. This must be reflective of a panic that set in amongst governments, each trying to protect their own skin in the eyes of the very concerned electorate by introducing quick measures. Divided, they stand. Read the rest of this entry »

There’s lots of hot debate at present as to why the US Government is supporting the Bailout plan in its current format. The people I’ve chatted to over the past few days all strongly disapprove of the plan. We keep coming back to the same question: why is the Bailout progressing in its current shape and form, whilst there seem to be alternative proposals out there – which are not being publicly debated?

Pressure for any solution: I put an opinion forward that there was pressure to adopt a solution, any solution, because the world economy is in unchartered territory (an unprecedented mess), economists don’t know what policies to adopt that work best in this situation, and there is panic in governments from not knowing who to turn to. Quick action of sorts is seen as better than inaction.

Merits of inaction: Inaction might have its merits, although it is an election loser in the USA. I wrote at length recently about why absence of any Bailout might actually be an option (a very painful one, indeed, possibly an equivalent of entering another Great Depression) – compared to a lengthy, expensive, painful, AND untested solution of the Great US Bailout.

Theory on Government paying off financiers: More interesting speculative thoughts as to why the US Government might be keen to rush into the Paulson plan was presented by Dandelion Salad on the 2nd of October. Quoting them –

What is happening is that the Bush administration is engineering a massive raid on the Federal treasury to pay off the people within the financial industry who have been operating the housing scam because the politicians told them to do it. This is hush money.

The people in the financial institutions who are getting the money will be passing it on to the big banks that leveraged their criminal lending practices. The giant sucking sound you hear is almost a trillion dollars of future taxpayer earnings going into the vaults of the nations’s biggest banks, such as Citibank, Bank of America, and—the pet bank of the Rockefeller family—J.P. Morgan Chase. Much will also go into the vaults of foreign investors such as the Bank of China.

A scary thought, isn’t it? I don’t think this is exactly the whole story of what is happening, but read the whole article – it’s a pretty interesting read.

Further slump in US stock markets: As a closing thought, a comment about current stock markets. Despite the Bailout plan being adopted in the US on Friday, US markets actually closed lower last week than they started on Friday, having temporarity risen during the day.

The newest shares slump reflects fears that the $700bn Bailout package might not be sufficient to provide enough liquidity in the markets to prevent a US recession. In economic speak, “expectations of the Bill being passed were already incorporated into stock markets” so once the Bill was adopted, the market looked to new information to respond to – and this came in the shape of rising unemployment figures.

Whatever happens next, we’ll have to try and keep a cool head, tighten our belts and ride out this storm. There are no miracle pills to take that might make this landing any softer.

 

Copyright 2008 by CuriouslyInspired

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