The world & the financial crisis

We were glad to be reminded of this wonderful Long Johns clip  about how it all began – laughter truly is the best medicine

Financial Times Report on World Economy

A light at the end of the tunnel?

(The Economist) THE dithering has ended. After a week in which the financial system almost ground to a halt, governments of the industrialised world seem at last to have found the right tools to get credit markets moving again. At the weekend and early on Monday October 13th officials in Europe, America and Asia announced unprecedented and comprehensive plans to prop up failing banks, guarantee their loans and flood the world with cash by providing unlimited dollar funds through central banks. At first blush—and in contrast to previous failures after half-hearted efforts—the new plans seem to be working. Stockmarkets rose around the world on Monday, although the real sign that the situation is improving will come in the credit markets this week.
All the actions are aimed at dealing with the three related problems that have blocked credit markets and the banking system. These are that banks have been unable to raise enough money in the frozen short-term money markets; that banks are unable to take out loans for three-to-five years to make up the shortfall between deposits and lending, because markets for longer-term borrowing are also shut; and, last, that they are struggling to win the trust of lenders because they do not have enough capital as a cushion against losses.

With oil prices in retreat, OPEC struggles to maintain unity
Members of the Organization of Petroleum Exporting Countries left an informal meeting in Cairo this weekend without an agreement to reduce production, but with rising doubts about fraying discipline and tensions within the group that accounts for 40 percent of the world’s oil exports.
28 November
The French president, Nicolas Sarkozy, is pushing his idea of a state-friendly market economy
France’s president, Nicolas Sarkozy, has responded to the disruption of global financial markets since September by promising the “return of politics” in the management of the French economy.
2 November
Brown, Sarkozy call for new Bretton Woods to deal with financials

(FT) British Prime Minister Gordon Brown and French President Nicholas Sarkozy have jointly called for the formation of a new Bretton Woods, a conference of G20 emerging and developed nations to build a new global financial architecture. Mr Brown and Mr Sarkozy will seek EU backing for their proposals at a special summit of EU leaders in Brussels on Friday. The British do not expect the Washington summit to resolve all – or even most – of the issues, but to send out a signal of a commitment to act that will start to restore confidence in battered markets.
28 October
Iceland requests a loan from the IMF
(The Economist) The Icelandic government has formally requested a US$2bn loan from the International Monetary Fund (IMF), three weeks after the state was forced to take control of the country’s three largest commercial banks. The meltdown in Iceland’s financial system has seen the near collapse of its stock and foreign exchange markets, and has also triggered the country’s worst diplomatic crisis since the Cod Wars ended in 1976. Alongside additional loans from Iceland’s Nordic neighbours, the IMF bail-out package and accompanying economic stabilisation programme is set to be agreed in early November. This will represent the first step in Iceland’s attempts to regain credibility in international markets. More decisive moves towards joining the EU may not be too long in coming.
America must lead a rescue of emerging economies
George Soros
(FT) The global financial system as it is currently constituted is characterised by a pernicious asymmetry. The financial authorities of the developed countries are in charge and they will do whatever it takes to prevent the system from collapsing. They are, however, less concerned with the fate of countries at the periphery. As a result, the system provides less stability and protection for those countries than for the countries at the centre. This asymmetry – which is enshrined in the veto rights the US enjoys in the International Monetary Fund, explains why the US has been able to run up an ever-increasing current account deficit over the past quarter of a century. The so-called Washington consensus imposed strict market discipline on other countries but the US was exempt from it.
Pakistan Urged To Take IMF Money

(Forbes) LONDON – Pressure is piling on Pakistan to accept financial help from the International Monetary Fund, or face a financial meltdown.
The already-poor outlook for Pakistan has dimmed very rapidly amid the freezing up of international credit markets. Pakistan’s foreign currency reserves have been falling at a rate of around $1.0 billion a month, and the central bank has been pushed to cover around six weeks of imports. The country estimates that it needs up to $15.0 billion from foreign lenders to cover its current financing needs.
27 October
(FT) IMF unveils plans for $16.5bn Ukraine loan
The Fund announced an outline $16.5bn loan agreement with Kiev, which is struggling to restore confidence in a shaky banking system and a sliding currency damaged by the global financial crisis.
On Friday, Iceland secured a $2bn loan from the IMF, the first western country to do so in three decades.
(FP Morning Brief) World stocks plunged yet again Monday as the financial crisis hit an unlikely candidate: Kuwait. The G7 is worried about the yen.
The Widening Gyre
(Paul Krugman, NYT) The troubles in the banking system, hedge funds and emerging markets are mutually reinforcing. Bad news begets bad news, and the circle of pain just keeps getting wider.
Japan’s banking system, until recently one of the strongest in the world, is battered
UNTIL recently Japanese banks had largely avoided the agonies of the credit crunch that had caused such difficulties in much of the rest of the world. Now the misery has well and truly come to Tokyo. The culprit is not toxic derivatives and swaps, but ordinary shares held by banks in Japanese companies. These cross-shareholdings, a peculiar feature of Japanese capitalism, are having pernicious effects. As share prices fall, banks are force to revalue their assets, which in turn reduces their capital ratios. The result is a need to raise capital quickly.
24 October
If the situation were not so dire, we could almost take pleasure in watching the mea culpas come in thick and fast.
‘Out of Control’ CEOs Spurned Davos Warnings on Risk
Oct. 24 (Bloomberg) — Once upon a time, the World Economic Forum was the ultimate Wall Street jamboree.
Now, in the riptide of the worst financial crisis since the Great Depression, WEF officials and delegates say many of the chief executive officers who gathered in Davos, Switzerland, over the last five years didn’t listen to warnings from their peers. Davos organizers also say they failed to play tough with the financial-industry bosses, opting to accept their funding and let them turn Davos into a rave-up for Wall Street excesses.The fallout has left the WEF riddled in buyer’s remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing.
23 October
Lean Times, Tough Steps In Hungary
(WSJ) As the financial shock that began in the U.S. reached deeper into emerging markets, Hungary’s central bank took the dramatic step of raising interest rates by a steep three percentage points in order to prevent a run on its currency.
Its move came as Belarus and Pakistan said Wednesday they are seeking large infusions of aid from the International Monetary Fund, while Ukraine suggested it is close to getting one. The Brazilian and Argentine stock markets each fell about 10% Wednesday, outpacing a steep drop in U.S. stocks.
The growing rout in emerging markets is dashing hopes that developing nations would prop up world economic growth at a time when the U.S. and Western Europe are experiencing the worst financial instability in decades. Instead, many emerging markets are the world economy’s new problem children.
Even countries that looked imperiously strong until recently, such as Russia and China, now fear painful declines in growth.
In the late 1990s emerging-markets crisis, many of the countries with shaky finances were in Asia. Now many of them are dotted around Europe’s periphery. Countries such as Iceland, the Baltic countries, Hungary and Turkey ran up large foreign debts in recent years when credit flowed cheaply and easily. To different degrees, they’re struggling to repay or replace those debts in today’s dramatically changed world.
Investors around the world are withdrawing their money from countries whose economies are vulnerable to a disruption in the supply of credit. As they flee to the relative safety of a newly resurgent dollar, uncertainties grow about how many emerging-market countries may need rescues, and how badly.
23 October
(The Economist) George Bush held a meeting at Camp David to discuss the global financial crisis with Nicolas Sarkozy, the French president, who is also the current head of the European Union, and José Manuel Barroso, the president of the European Commission. Later, a date of November 15th was set for a summit in Washington of 20 countries, including such emerging economies as China, India, Russia and South Korea. The summit will address a “common set of principles” for reforming the regulation of international markets. Broadly speaking, the Europeans want more of it, but the Americans are resisting.
17 October
Reuters offers a thorough and very depressing round-up of the signs of world-wide recession
Bush, Sarkozy to meet as signs of recession mount

Emerging markets in eastern Europe, battered by financial turmoil, may soon need outsiders’ help
WHICH country will be the next Iceland? The dramatic collapse of the Nordic country’s economy has concentrated international attention on other risky but obscure corners of the financial system. The stability of the Ukrainian hryvnia, the ill-regulated Kazakh banking system, and Hungarian borrowers’ penchant for loans in Swiss francs are subjects crowding on to policymakers’ desks.
16 October
Meltdown From Across the Atlantic|
Back to the Blitz
By ANDREW O’HAGAN
Many Londoners are seething at the subprime-mortgage disaster in America.
In Gold We Trust

By CHRISTOPH PETERS
Germans are reacting to the spreading financial crisis with remarkable calm.
Erin Go Bust

By JOHN BANVILLE
In Ireland, we wonder if all that wealth really have vanished so quickly, so comprehensively.
The Ice Storm

By GAUTI KRISTMANNSSON
Icelanders, aghast, have been told that we owe millions of dollars — to whom, we don’t know.
15 October
EU presses for reforms, recession signs mount
NEW YORK/BRUSSELS (Reuters) – European leaders pressed on Wednesday for an overhaul of global financial structures, building on trillion-dollar bank bailouts announced this week, as signs of global recession mounted.
14 October
Asia plans summit on global financial crisis
(Times Online) Asian finance ministers and central bankers may gather this weekend to hold an Asian version of the meeting that took place in Washington last Saturday and Sunday to discuss strategies for averting further financial crisis, Japanese government sources have told The Times.
Chilled by vivid memories of their own financial meltdown ten years ago, governments across Asia yesterday rushed to help to stem the bloodletting on stock markets and restore the architecture of the global credit system.
Yes, Chicken Little, the sky really is falling
NOURIEL ROUBINI
(Globe & Mail) — A generalized run on the banking system has been a source of fear for the first time in seven decades, while the shadow banking system – broker-dealers, non-bank mortgage lenders, structured investment vehicles and conduits, hedge funds, money market funds, and private equity firms – are at risk of a run on their short-term liabilities.
On the real economic side, all the advanced economies – representing 55 per cent of global GDP – entered a recession even before the massive financial shocks that started in late summer. So we now have recession, a severe financial crisis and a severe banking crisis in the advanced economies.
13 October
Ban urges protection for ordinary people during financial crisis
United Nations Secretary-General Ban Ki-moon Monday urged more action on the global financial crisis to protect ordinary people and blasted governments for their lack of coordinated response. Ban called for “deep and systematic reforms for a global financial system” to better reflect 21st century realities. Reuters (10/13)
States, Economies and Markets: Redefining the Rules
(Stratfor) it has always been our view that the state ultimately trumps the economy and the nation trumps multinational institutions. We are strong believers in the durability of the nation-state. It seems to us that we are seeing here the failure of multinational institutions and the re-emergence of national power. The IMF, the World Bank, the Bank for International Settlements, the European Union and the rest have all failed to function either to prevent the crisis or to contain it. The reason is not their inadequacy. Rather it is that, when push comes to shove, nation-states are not prepared to surrender their sovereignty to multinational entities or to other countries if they don’t have to. What we saw this weekend was the devolution of power to the state. All the summits notwithstanding, Berlin, Rome, Paris and London are looking out for the Germans, Italians, French and British. Globalism and the idea of “Europe” became a lot less applicable to the real world this weekend.
Nations coordinate bid to revive economies
(IHT) PARIS: In a sweeping round of far-reaching announcements from European capitals Monday, Britain took effective control of two of the country’s largest banks, and leaders in Paris, Berlin, Madrid and elsewhere offered more than a trillion euros in loan guarantees and other support intended to restore trust between banks and thaw frozen credit markets.
Markets cheer as Europe bails out banks
LONDON/NEW YORK (Reuters) – Stock markets rejoiced after governments worldwide launched multibillion-dollar bailouts on Monday to shore up banks, and Britain called for a new Bretton Woods agreement to reshape the world financial system.
Gov’ts should consider stimulus plans if possible: IMF head
WASHINGTON (AFP) — IMF head Dominique Strauss-Kahn said Monday that in the current global financial crisis, those governments that could afford it should consider stimulus plans for their economies.
Strauss-Kahn told the annual meeting of the International Monetary Fund and World Bank in Washington that “action in the financial markets is essential, but it is not sufficient. “We also need to deploy all of the instruments of modern macroeconomic policy to limit the damage to the real economy,” he said.
Europe acts to strengthen banks
Major European economies have announced multi-billion euro rescue schemes to shore up their banks.
Germany has approved a package worth up to 500bn euros (£393bn; $683bn), France will spend about 350bn euros and Spain has set aside 100bn euros.
The bulk of this money will be used to guarantee lending between banks – part of a plan agreed to this weekend by the 15 nations that use the euro.
African finance ministers blame global financial crisis on IMF
(The Punch, Nigeria) African ministers of finance have said that the International Monetary Fund must take part of the blame for the lapses that led to the ongoing global financial turmoil.
The ministers also said at the ongoing World Bank/International Monetary Fund autumn meetings in Washington, DC, United States, that a common currency was not an immediate need in Africa.
British government unveils £37bn banking bail-out plan
(The Guardian) The prime minister said the dramatic action would help the UK banking industry to survive the turbulence sweeping the world’s financial system, and also pledged to end the era of “rewards for failure” for top executives.
The UK government confirmed this morning that it will pump up to £37bn into Royal Bank of Scotland, Lloyds TSB and HBOS in an attempt to prevent the UK’s banking sector from melting down.
12 October
(NYT) Bold Pledges From Leaders, but Investors Await Details
WASHINGTON — After a whirl of emergency meetings, government leaders on both sides of the Atlantic made bold promises to rescue the global financial system, but were still racing to work out the details to calm battered stock markets before they opened on Monday morning.
Gordon Does Good
Paul Krugman, NYT
At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts.
G-7 Commit to `All Necessary Steps’ to Stem Crisis
Oct. 11 (Bloomberg) — Group of Seven finance chiefs, meeting after stocks plunged and as a global recession looms, vowed to prevent the collapse of major banks while failing to unveil new initiatives for thawing credit markets.
A sign of the strains: The G-7 ministers today met with President George W. Bush, an echo of former President Bill Clinton’s visit with the group in 1998 amid the Russian debt default and collapse of the hedge fund Long-Term Capital Management LP. … Bush also met with finance officials from the Group of 20, which includes emerging markets such as Russia and China.
(Times Online) Gordon Brown will travel to Paris today to urge European leaders to copy the British bailout programme and agree a Europe-wide plan to “recapitalise” struggling banks by taking equity stakes in them. America said this weekend it plans to do that.
In an unusual move, President Nicolas Sarkozy has invited Brown to join a meeting of eurozone heads of government to explain the merits of the UK model. A source close to the French presidency said eurozone leaders would take Britain’s initiative as a reference.
11 October
Europe’s death by guarantee
By Chan Akya
(Asia Times Online) Through the latest financial crisis, I warned readers that the costs of banking bailouts in Europe would far outstrip those of the United States. Following from my “quick and dirty” summary at the bottom of last week’s article (see Dismal math, Asia Times Online, October 4, 2008), this article expands on the subject at some length.
9 October
Canada rated world’s soundest bank system: survey
CANBERRA (Reuters) – Canada has the world’s soundest banking system, closely followed by Sweden, Luxembourg and Australia, a survey by the World Economic Forum has found as financial crisis and bank failures shake world markets.
But Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a 50 billion pound ($86.5 billion) pledge this week by the government to bolster bank balance sheets.
The United States … rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.
(The Economist) A special section on the crisis looks at prospects for the global economy, individual countries and markets. It begins with the tricky job of saving the financial system
8 October
IMF releases Chapter 8 of its latest World Economic Outlook (WEO) aptly titled Financial Stress, Downturns, and Recoveries
The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. Global growth is projected to slow substantially in 2008, and a modest recovery would only begin later in 2009. Inflation is high, driven by a surge in commodity prices, but is expected to moderate. The situation is exceptionally uncertain and subject to considerable downside risks. The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control.
Global Economy under Stress
After years of strong growth, the world economy is decelerating quickly (Chapters 1 and 2). Global activity is being buffeted by an extraordinary financial shock and by still-high energy and other commodity prices. Many advanced economies are close to or moving into recession, while growth in emerging economies is also weakening. Executive Summary
Oct. 8 (Bloomberg) Fed, ECB, BOE Cut Rates in Unprecedented Response to Combat Credit Freeze
7 October
Bush urges joint crisis response
The International Monetary Fund has also called for joint action estimating financial losses at $1.4 trillion.  Mr Bush said finance ministers from G7 nations would meet in Washington at the weekend to discuss the crisis.  Meanwhile governments around the world have taken more steps to try to ease the credit crisis.
Bush promises to solve financial crisis
Ah! This should make us all sleep much better.
(Foreign Policy Brief) Hoping to find ways to stem the panic, the U.S. government called an emergency meeting of global financial leaders, set for Saturday in Washington. Finance ministers and central bankers in town for the IMF and World Bank meetings will also be discussing the situation at the Treasury Department today.
“They’d better announce a coordinated rescue plan this weekend,” Paul Krugman argues, “or the world economy may well experience its worst slump since the Great Depression.”
Global rate cut a first
  JAY BRYAN, The Gazette
Central banks join forces. Governments across the world show they still have tricks up their sleeves
… we have had so many rescue plans in the past week that it’s hard to keep them all straight. First there was the $700-billion U.S. bailout for the banking sector. Many thought that would do the trick. Not really.
Since then, stock markets have kept swooning and credit markets have remained frozen in the United States and Europe.
Iceland: dancing on the brink of bankruptcy
(The Independent) Iceland, with a population the size of Bristol, is rated by the UN as the most developed society on earth. But it now faces less welcome distinction as the country worst exposed to the credit crunch, with banking debts several times bigger than its economy. … Political appointments in the banking sector and a hands-off approach by regulators created the conditions for a massive investment binge among Iceland’s banks and companies, funded almost entirely by foreign borrowing. Working with Icelandic entrepreneurs they made acquisitions across Europe including buying up major British high street names such as Hamleys, House of Fraser and Karen Millen. Iceland was acting more like a private equity fund than a country. They made themselves the most exposed country when the credit crunch finally arrived. [more on Iceland and Russia: Arctic Meltdown: Economic and Security Implications of Global Warming]
6 October
U.S. bailout does not allay fear of global recession
(NYT) Though the bailout package recently approved by the U.S. Congress and signed by President George W. Bush offers assistance to foreign banks, the plan has not reassured European investors.
5 October
Improvisation born of necessity in Europe’s crisis management
(IHT) Europe’s approach to the banking crisis is conspicuously fragmented, largely because a lack of cross-border regulation and oversight of private banks leaves it with little choice.
Bank rescues unravel

(Financial Post) Carefully-woven government plans to rescue banks deemed too big to fail came apart at the seams yesterday as private institutions refused to back deals brokered by politicians.
Berlin admitted it had a “mess” on its hands as banks backed out of a deal to save one of the country’s largest financial institutions.
The rifts further threaten the stability of the international banking network and came as world leaders struggled to divine a common approach to the unprecedented disaster unfolding in the financial system.
EU leaders call for global solution to credit crisis

Britain, France, Germany and Italy have called for an international conference “as soon as possible” to consider sweeping reforms of the global finance system.
6 October
U.S. bailout does not allay fear of global recession

Though the bailout package recently approved by the U.S. Congress and signed by President George W. Bush offers assistance to foreign banks, the plan has not reassured European investors.
Harper works on ‘plan’ to buffer Canada from global crisis
Mr. Harper may unveil some of the plans he has in mind Tuesday when his Conservative Party releases its full campaign platform in Toronto, and afterward speaks to a blue-chip Bay Street luncheon crowd.
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
By Ambrose Evans-Pritchard, The Telegraph
Investors will learn today whether the Paulson bail-out – fattened to $850bn (£480bn) by Congress – can begin to halt the death spiral in the credit system. So far, the response looks terrible. More
5 October
Improvisation born of necessity in Europe’s crisis management
(IHT) Europe’s approach to the banking crisis is conspicuously fragmented, largely because a lack of cross-border regulation and oversight of private banks leaves it with little choice.
Bank rescues unravel

(Financial Post) Carefully-woven government plans to rescue banks deemed too big to fail came apart at the seams yesterday as private institutions refused to back deals brokered by politicians.
Berlin admitted it had a “mess” on its hands as banks backed out of a deal to save one of the country’s largest financial institutions.
In New York, a merger to create the biggest retail branch network in America descended deeper into chaos as Citigroup secured a court injunction blocking the takeover of Wachovia by Wells Fargo, pitting the largest banks in the country against each other.
The rifts further threaten the stability of the international banking network and came as world leaders struggled to divine a common approach to the unprecedented disaster unfolding in the financial system.
EU leaders call for global solution to credit crisis

Britain, France, Germany and Italy have called for an international conference “as soon as possible” to consider sweeping reforms of the global finance system.
The move was announced after an emergency summit in Paris at which Prime Minister Gordon Brown and the leaders of France, Germany and Italy vowed to lead the way in restoring confidence and stability in the European economy – and urged the rest of the world to do the same.
3 October
The world’s headache becomes eastern Europe’s migraine
WHAT does the collapse of the pyramid scheme formerly known as the western financial system mean for the ex-communist world? The short-term answer is bad, and the longer-term answer even worse.
In the 1990s, a downturn in western markets proved to be surprisingly good news for new Europe: rich-world managers wanting to cut costs turned to outsourcing in countries that they had previously seen as too risky. This time will be different. Land and labour cost more … good workers are far more mobile and choosy: that’s nice for them, less so for their bosses. Failure to reform the education systems in most countries has blunted the competitive edge further. So has demography—the end of communism sent the birth rate plunging, so most countries in the region risk growing old before they get rich. The biggest question is what happens in big west European economies: dependence on export markets there is up to 40% of GDP for countries such as the Czech Republic. In short: if Germany gets a headache, eastern Europe gets a migraine.

One Comment on "The world & the financial crisis"

  1. Favorite Hungarian economist October 26, 2008 at 5:45 pm · Reply

    The explanation of the WSJ story [on Hungary of Oct. 23] is that non-residents hold large amounts of forint-denominated government bonds. When the external value of the forint appears to be shaky, these non-residents are likely to dump the bonds, and sell the forint proceeds for Euros or Dollars. In the process both the government bond markets and the exchange rate tank. That is why Hungary needs loans from the European Monetary Authority and the IMF.(The IMF Managing Director’s liaison with a Hungarian woman has nothing to do with this!)

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