Page 3 of
5 CREDIT BUBBLE
BULLETIN Liquidation is only solution to
crisis Commentary and weekly
watch by Doug Noland
these markets look as
if they are approaching - or, better, have hit -
the bottom… There are even hints that taxpayers in
the US could ultimately fund a
buyer-of-last-resort effort…"
April 4 -
Bloomberg (Christine Richard): "Fitch Ratings cut
the rating on MBIA Inc.’s insurance unit to AA
from AAA, saying the bond insurer no longer has
enough capital to warrant the top ranking. MBIA,
the world’s largest financial guarantor, would
need as much as $3.8 billion more in capital to
deserve an AAA…Fitch said…"
April 4 -
Bloomberg (Neil Unmack and Shannon D. Harrington):
"Gordian Knot Ltd.’s $40 billion Sigma Finance
Corp. had its Aaa
credit rating cut five
levels by Moody’s…as the value of its assets fell,
increasing the risk the credit fund may have to be
wound down… Sigma is the last and largest of the
companies that financed themselves in the
short-dated commercial paper markets to buy
longer-dated assets."
April 3 - Financial
Times (Ralph Atkins and David Oakley): "The
European Central Bank launched its first six-month
refinancing operation yesterday - but the action
failed to ease tensions in the money markets as
concerns over further bank writedowns and
liquidity weighed on sentiment. The auction of
€25bn ($39bn) in six-month funds marked a
significant extension of the ECB’s armoury in its
attempts to relieve pressures on short-term
interbank rates… The ECB allotted the cash at an
average rate of 4.61%..."
March 31 -
Bloomberg (Katherine Burton and Neil Roland):
"Citigroup Inc.’s six municipal-bond hedge funds,
which the bank bailed out with $600 million
earlier this month, have fallen to values ranging
from 10 cents to 60 cents on the dollar, a person
familiar with the situation said. The funds, sold
under the names ASTA and MAT, had $15 billion in
assets and about $2 billion in capital earlier
this month… ‘There has been some significant
decline in value, and some funds that suffered
pretty substantial losses,’ said Alex Samuelson, a
spokesman for Citigroup’s Smith Barney unit…
‘There has been a historic dislocation in the
credit markets.’"
March 31 - Bloomberg
(Ambereen Choudhury): "Mergers and acquisitions
bankers suffered a 35% drop in fees during the
first quarter, just weeks after cashing bonuses
from a record year. Advisory fees fell to about
$8.7 billion from $13.4 billion in the first three
months of 2007, data compiled by analysts
at…Freeman & Co. show."
April 2 -
Bloomberg (Sarah Mulholland): "Sales of bonds
backed by student loans have dropped 65% this year
compared with the first quarter of 2007 as lenders
exit the business, according to a report from UBS
AG. Investor demand for student-loan bonds has
dried up…"
April 3 - Market News
International: "The following are highlights from
the Office of the Comptroller of the Currency’s
fourth-quarter 2007 report on bank trading and
derivatives released Wednesday: Insured US
commercial banks lost $9.97 billion trading cash
and derivative instruments in the fourth quarter,
down $12.3 billion from third quarter revenues of
$2.3 billion. For the full year, banks recorded
$5.5 billion in trading revenues, down $13.3
billion from the record of $18.8 billion in 2006…"
April 1 - Bloomberg (Cecile Gutscher and
Neil Unmack): "Prices for high-yield, high-risk
loans in Europe dropped by a record the first
quarter, causing bigger losses for banks and hedge
funds. Deutsche Bank AG, Germany’s largest bank,
announced its steepest writedown at 2.5 billion
euros ($3.9bn)… UBS AG, the European bank with the
highest losses from the US subprime crisis,
reported a second straight quarterly loss today
after an additional $19 billion of writedowns.
Investors have abandoned the market for leveraged
loans on concern corporate defaults will rise
because of higher borrowing costs triggered by the
US subprime mortgage crisis…"
March 31 -
Market News International: "The [European] new
issues market is seeing the end of the first
quarter on a quiet note and, not surprisingly,
reports this morning point to the slowest start
for the market since 2002. Sales have reportedly
totalled E137 billion in Q1 versus E296 billion
last year, according to data compiled by
Bloomberg, with no high yield or junk bonds issued
since July last year."
April 1 - Reuters:
"Australian debt issuance fell 69% in the first
quarter of 2008 compared with the same period the
previous year, according to Thomson data, as the
global credit crisis made life tough for
borrowers."
Currency Watch April
1 - Financial Times: "Sick as a sovereign wealth
fund: how better to describe an investor who has
done a very large and exceptionally badly
performing deal. In the space of just a few
months, SWFs from Asia and the Middle East have
lost billions of dollars by recapitalising western
banks. Such losses, and the rapid fall in the US
currency, increase the risk that foreign investors
will lose their appetite for dollar assets. Abu
Dhabi’s implied capital loss on its investment in
Citigroup is about $2.5bn since last November.
December’s investment in Merrill Lynch by Temasek
of Singapore is off about $600m. Even that looks a
lot healthier than its compatriot fund GIC, which
alongside a still unnamed Saudi investor is down
by about $5.5bn on its investment in UBS of
Switzerland. Those losses are dwarfed, however, by
those that central banks are making on their
dollar reserve assets after repeated cuts in US
interest rates… There are signs that some foreign
investors are losing patience: South Korea's
$220bn National Pension Service has suggested it
may sell US Treasuries and buy higher-yielding
European government debt. Rejection of dollar
assets is dangerous for the US. A short-run risk
is that US companies lose an advantage in
international commerce: the willingness of their
trading partners to price in dollars and so bear
all of the currency risk."
April 2 -
Financial Times (Richard Lapper): "Migrant workers
are choosing to move to Europe, Australia or
Canada instead of the US in order to protect the
purchasing power of the money they send home to
their families, according to one of the world’s
leading experts on remittances. The shift is a
result of sharp falls in the value of the US
dollar against other international currencies… ‘We
are seeing workers from Bangladesh, Nepal and
especially the Philippines choosing destinations
where they’ll get paid in stronger currencies,’
Dilip Ratha, head of the World Bank’s remittances
and migration unit, told the Financial Times. Mr
Ratha said the trend was especially notable among
skilled workers, such as doctors, nurses and
information technology specialists."
The
dollar index rallied 0.5%, ending the week at
72.02. For the week on the upside, the Brazilian
real increased 3.0%, the South African rand 2.8%,
the Canadian dollar 1.7%, the South Korean won
1.5%, and the Australian dollar 1.0%. On the
downside, the Japanese yen declined 1.8%, the
Swiss franc 1.3%, the Danish krone 0.4%, the
Singapore dollar 0.4%, and the Euro 0.4%.
Commodities Watch April 3 -
Bloomberg (Jeff Wilson): "Corn rose above $6 a
bushel for the first time ever in Chicago as cool,
wet weather in the Midwest threatens to saturate
fields and delay planting in the US, the world’s
largest producer and exporter… Corn futures for
May delivery rose 4.25 cents… Most-active futures
have risen 73% in the past year on record world
demand for corn used to feed livestock and to make
ethanol."
April 4 - Financial Times
(Javier Blas): "Rising food prices could spread
social unrest across Africa after triggering riots
in Niger, Senegal, Cameroon and Burkina Faso,
African ministers and senior agriculture diplomats
have warned. Kanayo Nwanze, the vice-president of
the United Nations’ International Fund for
Agriculture, told a conference in Ethiopia that
food riots could become a common feature,
particularly after the price of rice has doubled
in three months. ‘The social unrest we have seen
in places such as Burkina Faso, Senegal or
Cameroon may become common in other places in
Africa,’ Mr Nwanze said. He added that some
African countries would struggle with rice prices,
which last week hit a high of $760 a tonne, up
from $373 a tonne in early January…" ‘Looking at
past experiences, whenever we have seen crisis in
one area [it] is a signal for other [countries] to
set safety valves [to avoid propagation],’ he
said."
April 2 - Financial Times (Alan
Beattie): "The rush across the developing world to
stop food leaving the region is a perfect example
of the old adage: be careful what you wish for.
For years, governments of poor countries, and
their champions in the rich world’s development
campaigns such as Oxfam, have been complaining
bitterly that farm-gate prices have been driven
down by overproduction and dumping by US and
European farmers. Now, food prices are rising. But
the governments involved, rather than celebrating,
are scrambling to stop their farmers benefiting
too much at the expense of their urban consumers.
In country after country, angry city-dwellers have
poured on to the streets complaining about the
unaffordability of food. Mexico City has witnessed
‘tortilla riots’ because of the high price of
maize, and thousands of Indonesians have protested
over shortages of soy beans. The problems are
particularly salient with basic grains such as
rice and wheat that provide the staple food for
many developing countries but in which there is a
big international market where farmers can seek
out the highest price."
April 2 -
Financial Times (Alan Beattie): "Governments
across the developing world are scrambling to
boost farm imports and restrict exports in an
attempt to forestall rising food prices and social
unrest. Saudi Arabia cut import taxes across a
range of food products on Tuesday, slashing its
wheat tariff from 25% to zero and reducing tariffs
on poultry, dairy produce and vegetable oils. On
Monday, India scrapped tariffs on edible oil and
maize and banned exports of all rice except the
high-value basmati variety, while Vietnam, the
world’s third biggest rice exporter, said it would
cut rice exports by 11% this year. The moves mark
a rapid shift away from protecting farmers, who
are generally the beneficiaries of food import
tariffs, towards cushioning consumers from food
shortages and rising prices."
Gold
declined 1.9% to $913 and Silver 1.0% to $17.56.
May Copper rose 3.2%. May Crude added 52 cents to
$106.14. April Gasoline gained 1.5%, while April
Natural Gas dropped 4.8%. May Wheat dipped 1.5%.
The CRB index added 0.1% (up 10.1% y-t-d). The
Goldman Sachs Commodities Index (GSCI) rose 0.3%
(up 12.8% y-t-d and 47.5% y-o-y).
China
Watch April 2 - Bloomberg (Dune Lawrence):
"Chinese consumers, facing the fastest inflation
in 11 years, are finding that the rising cost of
living has reached into the afterlife as buying a
graveyard plot becomes more expensive than a home.
Five of the capital’s major cemeteries charge as
much as 30,000 yuan ($4,273) per square meter for
a standard plot, compared with an average of
20,000 yuan per square meter for an apartment in
the city center…China Daily reported today. Land
scarcity, real-estate speculation and rapid
urbanization are fueling soaring prices for
graveyard plots as an increasingly affluent
population seeks to provide deceased loved ones
with a more lavish send-off."
March 30 -
Bloomberg (William Bi): "Pork prices in China, the
world’s biggest producer and consumer of the meat,
may stay at the current near-record high levels
for another year, Shanghai JC Intelligence Co.
said. Higher costs of feed and piglets will slow
herd expansion by farmers… China’s wholesale pork
prices almost doubled in the past year after
diseases and the worst snowstorms in decades in
southern China killed thousands of hogs. High meat
costs thwart government efforts to maintain social
stability and ease the fastest inflation in over a
decade. ‘Some rural residents have been forced to
cut back their meat consumption by as much as
two-thirds,’ Rang [Shanghai JC Intelligence
analyst) said… ‘Too many negative factors
challenge the confidence of farmers in investing
in hogs.’"
April 1 - Bloomberg (Wendy
Leung and Theresa Tang): "Hong Kong rice prices
may surge 30% in the next two months, an
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