Rescue plan disappointment contributes to sell-off

NF Reporter · 10-06-2008, 11:47 PM

AP - The government's $700 billion rescue, aimed at rebuilding economic confidence, appeared to sound a global alarm instead on Monday, triggering a fearful international sell-off as the U.S. began work on a plan that investors feared would be too little and too late to stave off a worldwide recession.

Full Story...

waltky · 10-20-2008, 05:18 AM

It gonna be rough...

Worst slump since the Great Depression of the 1930s
19 Oct 2008 - Major industrialised economies will suffer the worst downturn for 75 years, says Deutsche Bank.

Quote:

The warning underlines the fact that policymakers have failed to prevent the financial crisis from turning into a full-blown economic slump. It comes as world leaders agreed to hold a summit in New York billed as the “Bretton Woods meeting for the 21st century”. In its major assessment of the global economy’s health, Deutsche Bank also warned that Britain is even more vulnerable than the US or the euro area, as it predicted that the powerhouses of India and China would fail to support the wider global economy through the downturn.

The banks’ economists Thomas Mayer and Peter Hooper said: “We now expect a major recession for the world economy over the year ahead, with growth in the industrial countries falling to its lowest level since the Great Depression and global growth falling to 1.2pc, its lowest level since the severe downturn of the early 1980s.” According to the International Monetary Fund, global growth of anything less than 3pc constitutes a world recession. The warning was echoed by Richard Berner of Morgan Stanley, who said: “A global recession is now under way, and risks are still pointed to the downside for commodity prices and earnings.”

The forecasts came as President George W Bush called a summit of the Group of Eight leading economies for the weeks after the US Presidential Election in order to organise a concerted response to the economic downturn. Together with French President Nicolas Sarkozy and European Commission President José Barroso, Mr Bush slated a meeting which many think echoes the historic Bretton Woods summit which laid down a structure for the post-war financial system.

However, within minutes of the announcement, significant differences had opened up between Mr Bush, who has insisted that the new deal should not undermine free markets, and Mr Sarkozy, who said: “We cannot continue along the same lines because the same problems will trigger the same disasters. This sort of capitalism is a betrayal of the sort of capitalism we believe in.” The meeting may take place in the UN headquarters in New York, and the G8, which consists of the US, Japan, Germany, Russia, the UK, France, Italy and Canada, will be joined by others including India and China.

MORE

waltky · 10-28-2008, 05:00 AM

Euro at risk of collapse...

Europe on the brink of currency crisis meltdown
26 Oct 2008 - The crisis in Hungary recalls the heady days of the UK’s expulsion from the ERM.

Quote:

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump. Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992. “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits. The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles. Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn. Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

MORE

waltky · 10-29-2008, 01:18 AM

Another Zimbabwe?...

Hungarian currency collapses
Wednesday October 29 2008 - Days of new flats, cars and generous state benefits over as people find themselves deep in debt

Quote:

Jozsef Szepesi thought he was on to a winner when a few months ago his mortgage broker suggested a way of bypassing Hungary's high interest rates by taking out his 10m forint loan for the family home in Swiss francs. It seemed like a fine idea when the forint was strong - buoyed by the prospects that Hungary was soon to join the euro. But over the past few weeks he has watched with alarm as the forint has plummeted in value. Now one Swiss franc buys 188 forints, compared with 150 when he took out the loan, and his mortgage payments have soared. "They've risen from 60,000 to 85,000 (£260)," says Szepesi, an office clerk from Budapest whose monthly take-home pay is 175,000 forints. He also took out a five-year loan in Swiss francs for a car, repayments for which have risen 25% to £153 a month. "We can cut back to some extent, but we know this is only the beginning and the hardest time is probably yet to come," he said.

But Szepesi is by no means alone. Hard currency loans account for about 90% of mortgages taken out by Hungarian households since 2006, in response to years of high government borrowing which has pushed up interest rates and made low-interest foreign currency loans look ever more tempting. Even worse hit than Szepesi are those Hungarians who took out mortgages in Japanese yen and who have seen a 40% surge in their debt in just three months as the yen's value has soared to a 13-year high. Ordinary people with loans pegged to foreign currencies now face the prospect either of much higher payments if the forint continues to fall, or the chance to convert their foreign loans into local ones but to then pay horrendously high (11.5%) Hungarian interest rates.

The effect of a weak forint coupled with high interest payments and the reliance on foreign capital has sent Hungary's economy into freefall. Foreign banks and investors have been drawing capital in panic and experts have been warning of widespread bankruptcy - not just for ordinary citizens, but also possibly for the republic itself. The situation is a turnaround for a country used to pulling in investors, who once put more confidence in Hungary than in any other emerging market in the former communist east. This week the International Monetary Fund stepped in to stop any more investors from pulling their funds out of the country altogether. Hungary is now set to become the first EU state to receive an IMF lifebelt - of around €12.5bn.

More Days of new flats, cars and generous state benefits over as Hungarian currency collapses | Business | The Guardian

See also:

Financial crisis: IMF agrees to $25.1bn rescue deal for Hungary
29 Oct 2008 - The International Monetary Fund, the European Union and World Bank have agreed to a $25.1 billion (£15.6bn) economic rescue package for Hungary to help it cope with the global financial crisis.

Quote:

The IMF said it had reached an agreement with Hungary for a $15.7 billion loan deal, while the European Union stood ready with an additional $8.1 billion in financing and the World Bank another $1.3 billion. The IMF's portion falls under a 17-month stand-by loan arrangement and could be approved by the IMF board in early November.

"The Hungarian authorities have developed a comprehensive policy package that will bolster the economy's near-term stability and improve its long-term growth potential," IMF Managing Director Dominique Strauss-Kahn said in a statement. "At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," he added.

The agreed financing by the IMF is more than 10 times Hungary's IMF quota, way above the limit of three times the quota for countries in trouble. Each IMF member is assigned a quota based on its size in the world economy, which determines its financial commitment to the fund, its voting power, and has a bearing on how much it can borrow from the global lender.

Strauss-Kahn said the core measures of the program should help improve Hungary's fiscal balance and strengthen its financial sector. "Specifically, the package includes measures to maintain adequate domestic and foreign currency liquidity, as well as strong levels of capital, for the banking system," he said. "Important measures in the fiscal area will reduce government- financing needs and ensure longer-term debt sustainability," Strauss-Kahn added.

Hungary's financial markets firmed on Tuesday on hopes of the imminent financial help from the IMF, but its Prime Minister Ferenc Gyurcsany warned the Central European country is likely to slide into recession next year. The country has been battered by the financial crisis because its banking system is heavily exposed to foreign financing at a time when investors are pulling back from developing economies worldwide.

Source