FinancialExpat's Blog

US President George Bush has announced he will host an international summit in response to the current global financial difficulties sometime after the US presidential election in early November. The goal of the meeting is "to review progress being made to address the current crisis and to seek agreement on the principles of reform needed to avoid a repetition and assure global prosperity in the future." The meeting may prove to be the first in a series of meetings.

Sweden has become the latest European country to take action to stabilise its financial system with the creation of a USD 205 billion programme to boost liquidity in the system and take direct stakes in banks if needed. While its banks are stable and have experienced no liquidity or capital problems so far, they do control two thirds of lending in the Baltic states of Estonia, Latvia and Lithuania where economic concerns exist which could undermine Swedish banks.

The Dutch banking and insurance group ING has accepted a 10 billion euro capital injection from the Dutch government to boost its core capital. It is the first Dutch financial group to benefit from a 20 billion euro fund created a week ago by the Dutch government to recapitalise banks and insurers.

South Korea has joined countries in Europe, along with Hong Kong and Australia, in providing state backing to banks. The government will guarantee USD 100 billion in bank debts and supply lenders with USD 30 billion to stabilise its financial markets. South Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans. That's forced South Korea to rely on the wholesale market for about 44% of its funding, with international markets accounting for as much as 12%. The won has lost a third of its value this year, and dropped almost 10% last Thursday alone.

London interbank rates fell across the board with hopes rising among traders that measures by various national governments to guarantee loans and invest in banks are perhaps beginning to ease liquidity issues in money markets. Three-month Libor rates for dollar, euro and sterling on Friday fell to 4.41%, 5.02% and 6.16% respectively, all nearly half a percentage point down from a week ago.

State-backed rescue plans in the US, Europe and South Korea are encouraging purchases of higher yielding currencies funded in Japan, leading the yen to decline against other currencies. The yen declined to 137.93 per euro and 102.14 per dollar. Against the euro, the dollar weakened to USD1.3502 and the British pound rose to USD1.7470.

OPEC, the supplier of 40% of the world's crude oil, plans to cut output for the first time in two years at a meeting this Friday as the price of oil slides towards USD 50 a barrel. While OPEC may be able to prevent some of the price decline, analysts think it will be difficult for them to stem a price fall.

UK house prices posted the biggest annual decline in at least six years in October. The average asking price for a home fell 4.9% from a year earlier to 229,691 pounds (USD 398,000). In London prices dropped 2% from a year earlier. It is predicted by analysts that the UK economy will decrease 1% next year by analysts and they expect the Bank of England to lower the benchmark interest rate further in the coming months.

China's economic growth rate has fallen for the third quarter in succession at a rate of 9% in the three months to September, down from 10.1% over the previous quarter. A spokesman for the Chinese National Bureau of Statistics commented, "The growth rate of the world economy has slowed down noticeably. There are more uncertain and volatile factors in the international economic climate. All these factors have started to release their negative impact on China's economy."

India's central bank has unexpectedly lowered its key repurchase rate for the first time since 2004 from 9% to 8%. India's finance minister said, "I hope this reduction in interest rates will enthuse investors to continue to take forward their investment proposals." He further commented that the reduction "is consistent with our objective to moderate inflation as well as ensure satisfactory growth."

A survey by Nomura Asset Management UK has revealed that three quarters of northern European investors are planning to raise exposure to emerging markets equities over the next three years. Out of the 20 institutions surveyed, a quarter will raise their emerging market exposure between 4 & 10%, while the rest have more modest plans of increasing exposure by up to 4%. The survey also revealed that they are moving towards using more regional specialists rather than general emerging market fund managers in search of higher performance.

Posted by steve at 03:00 PM | Permalink

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Following in the wake of the US bailout plan for the US financial system the leaders of the 15 eurozone members pledged on Sunday to take steps to guarantee loans between banks and to inject fresh capital into their banking industry. First to act has been the German government which is preparing to endorse a bill to restore liquidity and capital into its banking and insurance sector worth up to 470 billion euro. The German bill, closely modelled on the British rescue plan announced last week, will initially empower the finance ministry to issue credit guarantees for inter-bank lending worth 400 billion euro up to December 2009. The ministry will also be allowed to draw up to 70 billion euro to inject fresh capital in the banks and insurance companies who request it.

The UK government, which is not part of the eurozone, has released details on its help for three major UK retail banks. Royal Bank of Scotland, HBOS plc and Lloyds TSB Group will receive fresh capital of 37 billion pounds (USD 64 billion) from the UK government in exchange for the government acquiring preference shares and setting conditions on matters such as executive bonuses. The UK government will also be able to appoint directors and set dividends. However, the UK government has stressed that it is not a permanent investor in UK banks and will dispose of all the investments over time in an orderly fashion once the banking sector stabilises. It is interesting to note that Northern Rock, the bank nationalised by the UK government last year, has already paid back half its 28 billion pound loan three months early. The UK government will also guarantee bank borrowing over the next six months.

Barclays, the UK's second biggest bank, plans to sell more than 6.5 billion pounds (USD 11 billion) of shares to private investors without turning to government help. HSBC, the UK's largest bank, had already announced last week that it has sufficient resources and won't participate in the UK government recapitalisation plan. Banco Santander, Spain's largest bank and owner of Abbey in the UK, has injected 1 billion pounds of fresh capital into its subsidiary, which includes Alliance & Leicester.

The Spanish government is to set aside a maximum of 100 billion euro (USD 136 billion) to guarantee inter-bank lending but the Spanish prime minister stressed that it is not needed yet as Spain's banks are solvent.

The Russian government has approved a package of measures worth USD 86 billion to assist Russian banks affected by the credit freeze. The government will make USD 50 billion available to banks to refinance foreign debt and the rest will be available as loans to the banks.

As more governments step into action to revive credit markets, experts expect money market rates to fall, after a week which saw the London inter-bank offered rate (LIBOR) reach a height of 4.82%.

Gold is still receiving attention from investors seeking an alternative from the equity markets. Gold rose 3.1% last week to USD 859 per ounce in New York. Crude oil rose from a 13-month low on news of the international governmental support for the banking system. Crude oil for November delivery rose as much as USD 3.92, or 5.1%, to USD 81.62 a barrel on the New York exchange. This still represents a 45% decrease from the record price in July.

The euro has also responded to the announcement by eurozone members. It has risen the most in three weeks against the dollar to USD 1.3657. The Australian dollar rose 5% to USD 0.6770 after the government announced it would guarantee all bank deposits for three years. The dollar declined 0.2% to 100.45 yen. Industry experts suggest that the yen may advance to 95 per dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings to bring money home in light of the global weakness in equities.

China's export growth rose 20% in September from a year earlier after gaining 21.1% in August, increasing the likelihood the Chinese government will step up spending to stimulate economic growth after the credit crisis has forced two interest rate cuts in a month for China. It is hoped to boost domestic demand to sustain China's fast growth in a stable fashion.

Posted by steve at 09:19 AM | Permalink

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Last week the US House of Representatives voted in favour of a USD700 billion bailout plan aimed at supporting the US financial system by removing tainted assets from bank balance sheets. Last Saturday leaders from the four biggest European economies stopped short of agreeing a similar package for European banks.

Hypo Real Estate, Germany's second-biggest commercial property lender, has been bailed out by the German government to the extent of 50 billion euro (USD68 billion). The German government has also given savers a commitment towards protecting their deposits and the UK, Spain and Portugal are expected to follow suit. This follows moves by the Irish, Danish and Greek governments to implement full protection for deposit holders. Sweden has substantially increased the level of protection and Austria has announced increased deposit protection but has yet to announce details.

BNP Paribas has confirmed it has agreed to buy 75% of Fortis's operations in Belgium and Luxembourg. In return, the governments of Belgium and Luxembourg will take a minority stake in BNP. The Icelandic government is reported to be agreeing measures for the country's banks to sell off some foreign assets in a bid to support its financial system. Iceland's currency has lost 20% against the dollar in the last week.

None of the banks, including the European Central Bank and Bank of England, have commented on potential rate hikes or cuts. But analysts believe the Bank of England, which meets this Thursday, will likely lower its rate below 5 percent. The ECB left its rate unchanged at 4.25 percent on Thursday, but opened the door to a rate cut.

The number of bank bailouts in Europe has caused stock markets to slide causing investors to seek the relative safety of government debt. European bonds have risen, sending the yield on the two-year note to the lowest level since March.

The euro declined to a 14 month low against the dollar at USD1.3598 and the weakest in two years versus the yen at 139.96. The yen was the best performer in September and the only currency to appreciate against the dollar.

Commodity markets have continued to slide and are heading for their biggest annual decline since 2001 as investors exit leveraged arrangements and slowing economic growth erodes demand for raw materials.

Crude oil for November delivery fell to USD89.96 a barrel on the New York Exchange. Prices declined 12% last week as reports showed US fuel demand for the previous four weeks was the lowest in seven years and that manufacturing had slowed in September at the fastest rate since 2001.

Posted by steve at 12:30 PM | Permalink

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