The global markets have not been doing so well. The bad news in the US is tame by comparison. Argentina might default again, Britain looks to be in recession, the Baltic Dry Index (a pulse on shipping) has collapsed, Russia’s up to shenanigans, and Australia is realizing that the law of unintended consequences enjoys physical humor (it just kicked Australia in the balls). I found some good articles on world events.
Let’s start with some “good” news from the “Go Fish” capitol of the world. Bloomberg reports IMF Considers Emergency Loan Program; Iceland Gets $2 Billion:
Iceland today became the first western nation to seek aid from the IMF since the U.K. in 1976. The nation’s economy will shrink as much as 10 percent next year, Paul Thomsen, head of the IMF delegation to Iceland, said at a press conference today.
The government took control of the island’s three biggest banks, Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf this month after they were unable to secure short-term funding. That precipitated the collapse of the krona, with the central bank attempting a currency peg, only to abandon the measure the following day.
The three banks together amassed debt worth $61 billion, equivalent to about 12 times the size of the economy.
$2 Billion sounds like a drop in the bucket, but Iceland was desperate. Remember that it was going to get a big loan from Russia? Well, that looks like it wasn’t the best fall-back plan.
Mish has a great post, Russian Default Risk Soars: LTCM Repeat Play. Rather than quote from it, I encourage you to read it. Here’s the gist: Russia needs to roll over $47 billion in debt immediately, and $150 billion soon, but the CDS spreads have widened to greater than Iceland’s when everyone thought they were screwed. In other words, nobody wants to buy Russian debt.
Despite actions by Russia to limit fund outflows, investors are finding ways to get their money out. Reuters reports FTSE Russia falls 23 percent while MICEX halted:
The FTSE Russia index of London traded Russian depositary receipts fell 23 percent, as sellers fled to the London Stock Exchange to sell off their positions while the MICEX and RTS exchanges in Moscow remained closed.
That’s going to hurt.
The British pound isn’t doing well against the dollar today. Bloomberg reports U.K. Pound Weakens Most Since at Least 1971 as Economy Shrinks:
The pound tumbled below $1.53 in its biggest drop in at least 37 years after a report showed the U.K. economy contracted more than forecast in the third quarter, bringing the nation to the brink of a recession.
The 5.9 percent intraday decline surpassed that of Black Wednesday in September 1992, when the U.K. was driven out of Europe’s Exchange Rate Mechanism. Gross domestic product shrank in the three months through September by more than twice as much as analysts predicted, a report showed today, putting the economy on course for its first recession since 1991. The FTSE 100 index slumped as much as 9.1 percent and the yield on the 10-year gilt headed for its biggest weekly decline in almost nine years.
Just like the US, anyone calling this “the brink of a recession” is an optimist. Recession is here (and, to be honest, it’s a lot nicer in the US than elsewhere).
I found an article that tried to lump as much bad news together as it could. Yahoo Finance is carrying the AP story World markets slide on economic growth fears:
World stock markets dropped Friday on fears that an economic downturn is spreading across the globe, eating into corporate profits.
European shares managed to recover their worst losses before closing for the weekend, while Asian stock were sharply down and Wall Street plummeted on the open, trading down 400 points, before rising to trade down 273, or 3.1 percent, at 8,418 points.
That’s just a sampling. The article has a lot of negative things to say.
The backlash from governments is, of course, expected. The world leader with the best 1980’s action movie villain name, Nicolas Sarkozy, has taken the opportunity to argue for a command economy. Bloomberg reports Sarkozy Summons De Gaulle’s Statist, Anti-U.S. Spirit:
Emboldened by the U.S. pursuit of a European-style bailout, Sarkozy has packed his wish list for an upcoming international summit with calls for everything from stiffer bank supervision and limits on executive pay to state aid for hand-picked industries. While the moment is in his favor, history is working against him: throughout the postwar era, French attempts to subdue globalization and come up with an exportable economic model have misfired.
Sarkozy is possibly retarded. Someone should check on that. “Aid for hand-picked industries” basically means that the government helps out poorly run companies at the expense of well-run companies. The US hasn’t learned that lesson yet either (Auto Industry). The law of unintended consequences is a bitch.
The Australians are just learning this important lesson from their bank guarantees. Once again, a well written post by Mish, Australian Funds Block Withdrawals. Again, read the post, it’s quite good. Also again, here’s the gist: since Australia guaranteed the banks (which were poorly run), money has left every other financial instrument (including those that were well managed). The result has been a swift kick to the happy-sack of Australia’s non-banking financial sector.
This is going to take a while to properly work its way through the markets. There will be collateral damage. Some of this will hit the American market. Anyone who blames the US subprime mortgage market clearly has their head up their ass (I’m talking to you, Ireland). The losses and size of the problem are so much larger than the total size of the subprime mortgage market, it’s just silly to point fingers. It’s also ridiculous to assume that things will get rosy if people could legislate away foreclosures or otherwise stimulate the American consumer. Another $600 check in the mail could not possibly fix things.
