Friday, 13 February 2009

ECB: "Messages in a Bottle"

Message #1 :

"European Central Bank board member Lorenzo Bini Smaghi said he’s concerned investors could lose confidence in governments unless they contain spending, raising the threat of a crisis in national finances.

“There is a risk that the mistrust that there is today in financial markets, in the banking system, is transformed into mistrust in states,” Bini Smaghi told the European Parliament in Brussels today. That could hobble the ability of some countries to issue debt, which would be a “financial crisis of the state

It looks clear to me that it is a warning from the ECB to government whose deficit could grow out of control. Not all have have room for manoeuvring. I think the Finnish government might have this privilege as it entered in this crisis well prepared (with a budget surplus and have so far avoided the mistakes made in 1989, although none of us can be sure if mistakes will not be made).

Now it's the case of municipalities budget which is somehow incredible. They have had about 20 years of continuous growth, profited in the phenomenal housing growth and yet their budget is already in the red, threatening to cut in social welfare, benefits and other in order...not to rise taxes (this is a republican type approach, or a kokomus one), which they will have to at some points.

Regarding municipalities, if they are bailed out, I do hope that the current management is removed and replaced by competent one...

Message #2:

"The European Central Bank could cut interest rates lower than 2 percent and will continue to provide liquidity to solvent banks, ECB Executive Board Member Jose Manuel Gonzalez-Paramo said on Wednesday.

"A rate of 2 percent is not the lowest rate we can think of, taking into account the situation right now, inflation expectations continue anchored and growth slowdown is intense
," Gonzalez-Paramo

As highlighted many times in this blog, interest rates will go in the first phase to 1%, most probably a rate cut of 50 basis in March, bringing the base rate to 1.5%, then another to 1% in either around June or September.

Obviously it all depends if an implosion occurs in different part of Europe:
-In eastern Europe, where social tension could rise amid implosive economical deterioration.
-In Spain where unemployment could be fatal for a quarter of the population.
-due to the collapse on few European banks, French, Nordic and others.

This dooms scenario can occur only if the situation is not stabilized by summer and emerging countries do not give the impetus required to kick start an unresponsive economical engine.

The ECB, working in cooperation of government inside (and outside, if there is) the EU, will try hard to avoided this doom scenario, so most probably they will try to be proactive, in order:
-to avoid any banks from collapsing, it might then create a bad bank that can absorb toxic asset held by banks.
-to stop debt cost from rising, which is currently the characteristics of Spain, Greece and Ireland , it will then create European bonds that will allow to fund at a cheaper rate those country and could be backed by the rest (Germany mainly).

That is just some thought on how the situation could get out of hand if confidence in the system is not and quickly or if "economical war" is started i.e protectionism by currency devaluation and state aid to key industry in a non competitive mindset.

Each country, outside the EU, will try to use the current crisis as a motivation to gain market share, economical strength and geopolitical influence. This won't be a fair game where all countries seem united to fight what could be the worse depression since the 1930's.

That are just some thought worth to share and of course all might be wrong.


Rui said...

It is time to, reset all the bank account to 0.

Total reboot.

Billpete002 said...

You mention that the US booted the CEO's of the bad banks. From what I've read some articles and as a recent example, the fiasco in the Senate with the banking CEO's. Of the higher management who caused or propped up this system 8 to 9 out of 10 are their still there.

It is a total failure on the US part to not throw them out on the street.

There are frankly three laws that made this whole crisis happen in the US:

(1)Mortgage backed securities were propped up by the US government giving a free lunch to lending companies.

(2)Under US law corporations are treated as citizens of the US (lessening the liability the owners of the company face if the company declares chapter 11 or 13 (bankruptcy)) If this was done away with the carrot and stick of the free market would work.

(3)As Prof. Nial Furguson in "The Ascent of Money" describes, in my opinion, well that the US and many Western countries have created 'a housing democracy'.

If we examine houses pre 1945 it was mainly the wealthy and well-to-do and majority of people rented. After WWII the US government created suburbs to house the returning veterans and their families (the baby boomers).

Giving someone a house ties them to the system, you are much less likely to revolt or rebel against your country because you own a stake or share in it (your house). In some sense this helped stem the tied of communism.

The problem with housing and promising everyone a house, is it is unsustainable (creating sprawl, wasting resources, etc.) and it makes people invest in a 1 way bet. You hedge everything into your land/house in the belief it will always rise. We are now seeing the fault of this belief.

The big question is now is how much money will be wasted till we realize this.

Andrew said...

America is coming around to getting to grips with the issue

Churchill said that american could be relied upon to do the right thing eventually.

Evidently finely thinking *and* feeling and sensing American people are focusing their attention upon this problem.

Charles Monk said...

FT warns today about problems in East Europe to which Swedish banks are very exposed.

To what extent is Nordea a single international bank? Can Nordea Finland survive a collapse of Nordea Sweden or are they too closely integrated? The same question arises for Danske/Sampo, I suppose.