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Oct 9th 2008
From The Economist print edition
A special section on the crisis looks at prospects for the global economy, individual countries and markets. It begins with the tricky job of saving the financial system
THIS was the week when governments and central banks around the world finally began to face up to the scale of their problems. As they did so, conventions toppled almost as fast as the banks they were trying to save.
On October 8th six central banks, including the Federal Reserve, the Bank of England and, notably, the hawkish European Central Bank, took the unprecedented step of announcing co-ordinated cuts in lending rates, with most trimming by half a percentage point. As European governments scrambled to shore up confidence, the ECB further upped the ante, saying it will offer banks as much cash as they want at its benchmark interest rate from October 15th. On October 7th America’s Federal Reserve lent unsecured to companies for the first time in its history and, a day later Britain unveiled the most ambitious effort yet to bail out a national banking system.
Even so, it was also the week that global finance almost stopped. There may not have been lines of customers queuing up outside banks to withdraw their savings, but in dealing rooms and corporate treasuries, the lines of trust that bind banks to one another and to their clients and creditors were snapping. “The global financial market has ceased to function,” declared Gordon Brown, Britain’s prime minister.
There was no mistaking the urgency of official action. Across the world, banks wobbled as they struggled to tap money markets for short-term loans. “A growing number of banks are being subjected to a wholesale version of a bank run, with access to [wholesale funding] evaporating in a matter of days, if not hours,” warned analysts at Citigroup. Those banks that could raise money were paying an exorbitant price (see chart). Markets for commercial paper were shut, starving companies of funding and sending stockmarkets tumbling. The contagion then spread to insurers, which own large slugs of shares.
Almost every country’s banking system is stricken with three interrelated problems: having taken huge losses, the banks need capital; because they cannot borrow in the longer-term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits; and because the short-term money markets are closed, the banks are cut off from their main source of liquidity.
Most bail-out efforts have attacked this three-headed monster from one side or the other. The British plan assaulted it on all fronts. To recapitalise its banks, Britain will inject as much as £50 billion ($87 billion) directly into them in exchange for preference shares. The government has not yet said what level of capital it now expects banks to hold against bad times. But analysts reckon the first stage of the plan, involving an investment of £25 billion, could increase their core Tier-1 capital ratios, the equity and reserves that are the purists’ measure of a bank’s cushion against unexpected losses, by up to two percentage points, to more than 7%. Britain’s biggest banks have all signed up to the new capital requirement, whatever that may be (although the strongest of them, such as HSBC, have said they will reach it without government help).
The second leg of the British plan is to help free up the market for short-term liquidity by lending to banks for up to three months. The idea is to double an existing £100 billion Bank of England programme to give banks highly liquid instruments in exchange for gummed-up mortgage-backed securities and other illiquid assets.
The third leg is to try to kick-start lending to banks over lengthier periods, of up to about three years, an eternity at a time when lenders’ horizons stretch no farther than the next day. The plan proposes to get the market working again by guaranteeing about £250 billion of new bank debt that will be issued as old borrowing matures. The government will charge for its guarantee on unspecified commercial terms, but it will be open only to those banks that have increased their capital.
Will the plan work? One possible weakness is its failure to buy bad assets from the banks. But there was relief at such sweeping action from a country with some of the world’s largest banks, one of the worst house-price bubbles and a record of dithering over failures like Northern Rock. Although shares in most British banks fell on the fear that investors will be diluted, the cost of insuring bank debt also dropped sharply.
No plan is an island
That is fine as far as it goes, but the plan will only prove itself a success if it can weather the storms to come and if other countries also act. “These measures, by themselves, are unlikely to be enough to end the financial crisis,” says Michael Saunders, an economist at Citigroup. “It is unlikely that the actions of any one country can return financial conditions in that country to normal.” By this measure, the picture is mixed.
America has been more inventive than anywhere else in combating the crisis. As psychotherapists in New York City tout for business treating the financially crushed, the Fed has pinned the American financial system to the couch. This week it increased its discount-window lending programme for banks to $900 billion. It also began paying interest on the reserves that banks park with it overnight (see article). This will make it easier for the central bank to manage interest rates as it sprays the markets with liquidity.
On October 7th the Fed waded into the market for commercial paper, the short-term debt issued by banks and companies. It even stooped to lending without demanding collateral. Action was needed. Overnight interest rates on commercial paper had doubled in less than a month, to around 4%, and the market had shrunk dramatically, as former buyers of the paper flocked to the shelter of government bills. Worryingly, the central bank’s move had mixed results. Overnight commercial-paper rates fell, but one-week rates jumped as lenders continued to worry about taking on longer exposures.
The intervention reflected the first signs that the paralysis in the money markets is spreading beyond banks and starting to affect the rest of the economy. A growing number of states and municipalities, which borrow in the commercial-paper markets against future tax revenues, have found themselves shut off from their usual sources of finance. Companies in America and beyond are cutting spending and are adding to the pressure on banks by drawing down their existing overdraft facilities whether they need the money or not—as if “buying booze on fears of prohibition,” says CreditSights, a research group.
As the misery spreads, the authorities are twisting and turning. American International Group, an insurer rescued by the government, looks as if it may run through its $85 billion credit line and may need to borrow billions of dollars more. The much-trumpeted American bail-out plan, approved on October 3rd, is being criticised for concentrating on buying toxic assets. It looks increasingly likely to put new equity into the banks too (see article).
The rescues in continental Europe have been no tidier—and they commit the extra offence of looking grudging and makeshift to boot. The deposit guarantees announced in Ireland, Germany, Greece and elsewhere since October 1st have been a mix of legislation (worth something) and solemn prime-ministerial pledges (worth very little). By and large, the guarantees were designed in haste and without consultation with other European countries.
It did not help Europe’s cause when its two biggest bank rescues to date unravelled before being stitched together again. Hypo Real Estate, a German commercial-property lender, had to beg for more money from a consortium of private and official lenders. Attempts to address the solvency of Fortis, a Belgo-Dutch bank, also went awry. As much as half of the €4 billion ($5.5 billion) of capital that the Dutch government pledged to inject into the bank’s network in the Netherlands on September 29th immediately “walked out the door” in the form of electronic withdrawals by consumers, says someone close to the bank. The Dutch ended up fully nationalising Fortis’s operations in the Netherlands. On October 5th BNP Paribas snapped up the rest.
Eyes wide shut
Continental European governments have yet to take a systemic or co-ordinated approach to the three-headed monster—solvency, funding and liquidity, though the banks are calling on them to follow Britain’s lead. Their reluctance reflects not just politics, but also two flawed assumptions. The first is that the financial system is chiefly suffering from transatlantic contagion. That view fails to take account of their own slowing economies and the slumping housing markets in countries such as Spain and Ireland. And it fails to acknowledge European banks’ dependence on wholesale funding.
Governments also assume that they would inevitably have to pay more through a European fund to bail out banks than through their own national schemes. In the land of the Common Agricultural Policy, that is a powerful argument. But going it alone may not work, and the eventual cost of a continued freeze in credit markets, or of the collapse of a large cross-border European bank, threatens far to outweigh the eventual cost of recapitalising Europe’s most vulnerable banks.
Almost in spite of themselves, however, European governments have been drawn into taking ever larger steps. In Spain, where bank regulators have been more conservative than most, the government is setting up a €50 billion fund to buy bank assets. Germany’s surprise decision to guarantee retail deposits came after it loudly denounced Ireland’s beggar-thy-neighbour decision to guarantee the liabilities of its banks. Germany’s volte-face may have been prompted by large numbers of electronic withdrawals of deposits at the weekend, says Nigel Myer, an analyst at Dresdner Kleinwort in London. Denmark has issued a complete guarantee of deposits. France is planning to create a body to take stakes in failing banks. Like America, Europe may ultimately end up with a comprehensive approach that will probably include taking equity stakes in many banks, reckons Holger Schmieding, an economist at Bank of America.
That raises an unpleasant question: how much capital will be needed to restore the solvency of American and European banks? The IMF has tried to find an answer by forecasting a large set of factors, including how loans will sour and the effect of banks taking off-balance-sheet assets back onto their books. The fund assumes that bank bosses act sanely, cutting dividends and allowing assets to shrink as loans mature. On this basis, using a target core Tier-1 ratio of 8%, the banks need $675 billion of new capital, perhaps two-thirds of it in Europe. Simon Samuels, an analyst at Citigroup, reaches a similar conclusion using a slightly different approach: he estimates Europe’s shortfall at $400 billion.
These are huge numbers. But next to the world’s capital markets they are less daunting. Total worldwide proceeds from initial public offerings in all sectors in the past decade were $1.5 trillion, according to Dealogic, a data provider. The IMF’s estimate represents 2% of global stockmarket value. The private sector could afford to recapitalise the banking industry if it wanted to.
Whether it will on its own, even with liquidity support from governments, remains to be seen. You can count on one hand the number of Western banks in a position to rescue big rivals by buying them. Only a very few other lenders think they command enough market confidence to try to raise equity without government support, among them UniCredit, a big Italian bank, and Bank of America.
Most other banks that are short of capital are likely to need government money. The hope is that this stimulates a parallel flow of private money. Faced with dilution by the state, some shareholders may conclude that stumping up more cash is the lesser of two evils. And the prospect of investing alongside governments may finally persuade private-equity firms and sovereign-wealth funds to reopen their bulging wallets. Waiting for them to come to the rescue is, however, no longer an option. When global finance stops, only governments can get it started again.更多精彩文章及讨论，请光临枫下论坛 rolia.net
Oct 9th 2008
From The Economist print edition
A special section on the crisis looks at prospects for the global economy, individual countries and markets. It begins with the tricky job of saving the financial system
THIS was the week when governments and central banks around the world finally began to face up to the scale of their problems. As they did so, conventions toppled almost as fast as the banks they were trying to save.
On October 8th six central banks, including the Federal Reserve, the Bank of England and, notably, the hawkish European Central Bank, took the unprecedented step of announcing co-ordinated cuts in lending rates, with most trimming by half a percentage point. As European governments scrambled to shore up confidence, the ECB further upped the ante, saying it will offer banks as much cash as they want at its benchmark interest rate from October 15th. On October 7th America’s Federal Reserve lent unsecured to companies for the first time in its history and, a day later Britain unveiled the most ambitious effort yet to bail out a national banking system.
Even so, it was also the week that global finance almost stopped. There may not have been lines of customers queuing up outside banks to withdraw their savings, but in dealing rooms and corporate treasuries, the lines of trust that bind banks to one another and to their clients and creditors were snapping. “The global financial market has ceased to function,” declared Gordon Brown, Britain’s prime minister.
There was no mistaking the urgency of official action. Across the world, banks wobbled as they struggled to tap money markets for short-term loans. “A growing number of banks are being subjected to a wholesale version of a bank run, with access to [wholesale funding] evaporating in a matter of days, if not hours,” warned analysts at Citigroup. Those banks that could raise money were paying an exorbitant price (see chart). Markets for commercial paper were shut, starving companies of funding and sending stockmarkets tumbling. The contagion then spread to insurers, which own large slugs of shares.
Almost every country’s banking system is stricken with three interrelated problems: having taken huge losses, the banks need capital; because they cannot borrow in the longer-term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits; and because the short-term money markets are closed, the banks are cut off from their main source of liquidity.
Most bail-out efforts have attacked this three-headed monster from one side or the other. The British plan assaulted it on all fronts. To recapitalise its banks, Britain will inject as much as £50 billion ($87 billion) directly into them in exchange for preference shares. The government has not yet said what level of capital it now expects banks to hold against bad times. But analysts reckon the first stage of the plan, involving an investment of £25 billion, could increase their core Tier-1 capital ratios, the equity and reserves that are the purists’ measure of a bank’s cushion against unexpected losses, by up to two percentage points, to more than 7%. Britain’s biggest banks have all signed up to the new capital requirement, whatever that may be (although the strongest of them, such as HSBC, have said they will reach it without government help).
The second leg of the British plan is to help free up the market for short-term liquidity by lending to banks for up to three months. The idea is to double an existing £100 billion Bank of England programme to give banks highly liquid instruments in exchange for gummed-up mortgage-backed securities and other illiquid assets.
The third leg is to try to kick-start lending to banks over lengthier periods, of up to about three years, an eternity at a time when lenders’ horizons stretch no farther than the next day. The plan proposes to get the market working again by guaranteeing about £250 billion of new bank debt that will be issued as old borrowing matures. The government will charge for its guarantee on unspecified commercial terms, but it will be open only to those banks that have increased their capital.
Will the plan work? One possible weakness is its failure to buy bad assets from the banks. But there was relief at such sweeping action from a country with some of the world’s largest banks, one of the worst house-price bubbles and a record of dithering over failures like Northern Rock. Although shares in most British banks fell on the fear that investors will be diluted, the cost of insuring bank debt also dropped sharply.
No plan is an island
That is fine as far as it goes, but the plan will only prove itself a success if it can weather the storms to come and if other countries also act. “These measures, by themselves, are unlikely to be enough to end the financial crisis,” says Michael Saunders, an economist at Citigroup. “It is unlikely that the actions of any one country can return financial conditions in that country to normal.” By this measure, the picture is mixed.
America has been more inventive than anywhere else in combating the crisis. As psychotherapists in New York City tout for business treating the financially crushed, the Fed has pinned the American financial system to the couch. This week it increased its discount-window lending programme for banks to $900 billion. It also began paying interest on the reserves that banks park with it overnight (see article). This will make it easier for the central bank to manage interest rates as it sprays the markets with liquidity.
On October 7th the Fed waded into the market for commercial paper, the short-term debt issued by banks and companies. It even stooped to lending without demanding collateral. Action was needed. Overnight interest rates on commercial paper had doubled in less than a month, to around 4%, and the market had shrunk dramatically, as former buyers of the paper flocked to the shelter of government bills. Worryingly, the central bank’s move had mixed results. Overnight commercial-paper rates fell, but one-week rates jumped as lenders continued to worry about taking on longer exposures.
The intervention reflected the first signs that the paralysis in the money markets is spreading beyond banks and starting to affect the rest of the economy. A growing number of states and municipalities, which borrow in the commercial-paper markets against future tax revenues, have found themselves shut off from their usual sources of finance. Companies in America and beyond are cutting spending and are adding to the pressure on banks by drawing down their existing overdraft facilities whether they need the money or not—as if “buying booze on fears of prohibition,” says CreditSights, a research group.
As the misery spreads, the authorities are twisting and turning. American International Group, an insurer rescued by the government, looks as if it may run through its $85 billion credit line and may need to borrow billions of dollars more. The much-trumpeted American bail-out plan, approved on October 3rd, is being criticised for concentrating on buying toxic assets. It looks increasingly likely to put new equity into the banks too (see article).
The rescues in continental Europe have been no tidier—and they commit the extra offence of looking grudging and makeshift to boot. The deposit guarantees announced in Ireland, Germany, Greece and elsewhere since October 1st have been a mix of legislation (worth something) and solemn prime-ministerial pledges (worth very little). By and large, the guarantees were designed in haste and without consultation with other European countries.
It did not help Europe’s cause when its two biggest bank rescues to date unravelled before being stitched together again. Hypo Real Estate, a German commercial-property lender, had to beg for more money from a consortium of private and official lenders. Attempts to address the solvency of Fortis, a Belgo-Dutch bank, also went awry. As much as half of the €4 billion ($5.5 billion) of capital that the Dutch government pledged to inject into the bank’s network in the Netherlands on September 29th immediately “walked out the door” in the form of electronic withdrawals by consumers, says someone close to the bank. The Dutch ended up fully nationalising Fortis’s operations in the Netherlands. On October 5th BNP Paribas snapped up the rest.
Eyes wide shut
Continental European governments have yet to take a systemic or co-ordinated approach to the three-headed monster—solvency, funding and liquidity, though the banks are calling on them to follow Britain’s lead. Their reluctance reflects not just politics, but also two flawed assumptions. The first is that the financial system is chiefly suffering from transatlantic contagion. That view fails to take account of their own slowing economies and the slumping housing markets in countries such as Spain and Ireland. And it fails to acknowledge European banks’ dependence on wholesale funding.
Governments also assume that they would inevitably have to pay more through a European fund to bail out banks than through their own national schemes. In the land of the Common Agricultural Policy, that is a powerful argument. But going it alone may not work, and the eventual cost of a continued freeze in credit markets, or of the collapse of a large cross-border European bank, threatens far to outweigh the eventual cost of recapitalising Europe’s most vulnerable banks.
Almost in spite of themselves, however, European governments have been drawn into taking ever larger steps. In Spain, where bank regulators have been more conservative than most, the government is setting up a €50 billion fund to buy bank assets. Germany’s surprise decision to guarantee retail deposits came after it loudly denounced Ireland’s beggar-thy-neighbour decision to guarantee the liabilities of its banks. Germany’s volte-face may have been prompted by large numbers of electronic withdrawals of deposits at the weekend, says Nigel Myer, an analyst at Dresdner Kleinwort in London. Denmark has issued a complete guarantee of deposits. France is planning to create a body to take stakes in failing banks. Like America, Europe may ultimately end up with a comprehensive approach that will probably include taking equity stakes in many banks, reckons Holger Schmieding, an economist at Bank of America.
That raises an unpleasant question: how much capital will be needed to restore the solvency of American and European banks? The IMF has tried to find an answer by forecasting a large set of factors, including how loans will sour and the effect of banks taking off-balance-sheet assets back onto their books. The fund assumes that bank bosses act sanely, cutting dividends and allowing assets to shrink as loans mature. On this basis, using a target core Tier-1 ratio of 8%, the banks need $675 billion of new capital, perhaps two-thirds of it in Europe. Simon Samuels, an analyst at Citigroup, reaches a similar conclusion using a slightly different approach: he estimates Europe’s shortfall at $400 billion.
These are huge numbers. But next to the world’s capital markets they are less daunting. Total worldwide proceeds from initial public offerings in all sectors in the past decade were $1.5 trillion, according to Dealogic, a data provider. The IMF’s estimate represents 2% of global stockmarket value. The private sector could afford to recapitalise the banking industry if it wanted to.
Whether it will on its own, even with liquidity support from governments, remains to be seen. You can count on one hand the number of Western banks in a position to rescue big rivals by buying them. Only a very few other lenders think they command enough market confidence to try to raise equity without government support, among them UniCredit, a big Italian bank, and Bank of America.
Most other banks that are short of capital are likely to need government money. The hope is that this stimulates a parallel flow of private money. Faced with dilution by the state, some shareholders may conclude that stumping up more cash is the lesser of two evils. And the prospect of investing alongside governments may finally persuade private-equity firms and sovereign-wealth funds to reopen their bulging wallets. Waiting for them to come to the rescue is, however, no longer an option. When global finance stops, only governments can get it started again.更多精彩文章及讨论，请光临枫下论坛 rolia.net