First the good news, the Fernandez de Kirchner Administration is keen on servicing its external obligations. After the debacle of 2002, the Kirchners took great pride in restoring economic, financial and political stability. In return for their stewardship, the two rulers expect the loyalty, adoration and support of the population. However, failure to ensure the continuation of this stability would break the social contract between leader and subjects—at least that is what they think. Therefore, the Kirchners will do everything they can to service their debt obligations, even if it means nationalizing the private pension fund system (AFJP). Unfortunately, they never appreciated the damage such a decision would have on the real economy or the reaction it would trigger in the marketplace. However, how could they?–if they ruled Argentina like their own personal domain. Unfortunately, this is a characteristic of populist leaders—be it on the left or on the right of the political spectrum. Colombian President Alvaro Uribe, another populist, never consulted the country’s many prominent economists before introducing capital controls. Why should he? By definition, a populist rules for the masses, eschewing all of the corporatist organizations and political parties that typify institutional regimes. Therefore, the fact that the Kirchners hatched up such an ill-conceived scheme late one night, without consulting anyone else, as a means to bolster market confidence should come as no surprise. Nevertheless, there is some good news in Argentina. The country’s macroeconomic indicators are impressive. GDP growth should top 6% y/y in 2008. International reserves are north of $47 billion. The primary surplus is 3.5% of GDP, and the current account surplus is 2% of GDP. Exports soared 45% y/y in September, while imports rose 34% y/y; thus bringing the trade surplus for the first nine months of the year to $10.2 billion. Last of all, there is virtually no leverage within the Argentine consumer sector. However, there is also bad news.
Why has the yen strengthened so much the week, even though the Japanese stock market has plummeted? The financial media have largely got this one right: the answer is unwinding of the carry trade, and the associated flight to quality, which means flight to yen and dollar (cash and treasury bills).
1. The problem is that banks are not making loan modifications as they did in the past. That is turn is due to securitization In the old days, including in the nasty (in the Southwest and Texas) housing bear market of the early 1990s, it was standard practice for banks to modify mortgages. That was not charity on the part of the bank but a cold-blooded economic calculation, that in the majority of cases, it would take a lower loss by changing mortgage terms than by foreclosing.
Among the more probable long-run casualties of today’s global and financial market crisis will be any further expansion of European monetary union. It is also more than likely that today’s global financial market crisis will mark the end of any serious challenge by the euro to the US dollar as an alternate international reserve currency.
Last week saw an important milestone in the credit default swaps sector, when counterparties to CDS trades on Lehman Brothers cash-settled their transactions.
Based on a protocol and auction process developed by ISDA, protection sellers paid 91 cents on the dollar to protection buyers. An estimated $6bn to $8bn was paid out. Over the past 25 years, the privately negotiated derivatives industry has developed a robust framework – one that governs and guides participants through such an event, and which includes procedures and processes for valuing and unwinding trades. Recent defaults show the value of these efforts – the industry’s infrastructure clearly works.
Yesterday was not a good day to be long stocks – in any country. In China the market dropped nearly 3% in the first half hour of trading, and then took off another 3% over the rest of the day, with the SSE Composite closing the day at 1723, down 6.3%. A number of large companies went down by their 10% daily limit, putting pressure on stocks to decline further when the market reopened today.
What evil lurks around the next corner? What horror story scares you the most? Halloween has come to Wall Street and instead of handing out treats, this street has only tricks. CDO’s dressed up as top grade investments. Financial institutions dressed up like unsinkable Titanics. Rigged Casinos dressed up like free markets. >From Darth Paulson “forcing” the Death Stock bailout package, to the Headless Horseman Bernake throwing flaming rate cuts, fear has gripped the world this October. Our politicians, and their bipartisan views, are like Lenny and George, (lacking any real direction) and the US economy and the dollar are like cute little squeezable bunnies. Our media looks like the little man from the monopoly game, and has been renamed Rupert Murdoch.
…and the only economist to get it right is named Dr Doom!
In this issue of The IRA, we turn to two veteran observers of the Fed and the US political process to get some perspective on the financial crisis and the policy makers who have arguably caused much of the present economic difficulty.
Roger M. Kubarych is Chief US Economist of UniCredit Global Research, part of UniCredit Markets and Investment Banking. He joined HVB Americas Inc., now part of UniCredit Group, in July 2001 with responsibility for advising management and clients on economic, financial market, and policy developments with significant implications for banking and investment decisions. He is also the Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at the Council on Foreign Relations. He has published two books: Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (2001) and Foreign Exchange Markets in the United States (1980).
GDP was negative in Q3 — worst quarter since Q3 2001 — and the headline number doesn’t even do the extent of the contraction justice:
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.
Foreclosures accelerate the falling prices for real estate and mortgage backed securities and are causing a vicious cycle of distress throughout the financial system. Mortgage foreclosures and write downs of mortgage debt deplete Tier 1 Capital which reduces bank lending. This leads to reduced business activity and increased unemployment which leads to further defaults and foreclosures. As foreclosures increase and neighborhoods deteriorate and unemployment rises, the damage will likely be more than economic.