Page 2 of 4 CREDIT BUBBLE BULLETIN Hoping there's hope
Commentary and weekly watch by Doug Noland
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $1.037 TN y-o-y, or 17.7%, to $6.898 TN.
Global Credit Market Dislocation Watch
October 6 - Bloomberg (Caroline Hyde): "Losses from the credit crisis may rise
to $1.7 trillion, leaving the US Troubled Asset Relief Program inadequate to
clear toxic securities from banks' balance sheets, according to JPMorgan Chase
& Co. analysts. 'The $700 billion on the Treasury balance sheet at risk is
really a loan,' analysts including ... Christopher Flanagan wrote ... 'Banks
could need this amount in a capital injection to remain viable.'"
October 7 - Bloomberg (Christopher Condon and Bryan Keogh): "The Federal
Reserve's decision today to buy US commercial paper came after money-market
mutual funds fled the market, cutting off a vital source of short-term
corporate financing ... Money-market funds, the biggest buyers of commercial
paper, reduced holdings of the highest-rated debt by $200.3 billion, or 29%, in
the final two weeks of September, according to ... IMoneyNet Inc ... "
October 9 - Bloomberg (Neil Unmack): "The $50 trillion credit-default swap
market is a 'walking zombie' after investors lost money on contracts linked to
Fannie Mae and Freddie Mac bonds even when they were bailed out, according to
UniCredit SpA. The US government's seizure of the mortgage companies prompted
an auction of their debt so that traders who bought and sold default protection
could settle contracts. The price for Fannie senior debt was set at 91.5 cents
on the dollar, resulting in a loss of about $25 billion for investors who sold
protection, UniCredit's Philip Gisdakis said. 'If you put on the right trade -
that banks will be bailed out - and you end up making a huge loss when you are
right, you will simply stop using these instruments because they are
unpredictable. The market, in its current form, is a walking zombie.'"
October 10 - Bloomberg (Shannon D. Harrington and Neil Unmack): "Sellers of
credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have
to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout
in the $55 trillion market. An auction to determine the size of the settlement
on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the
debt ... Based on the results, sellers of protection may need to make cash
payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione
... said ... No one knows exactly how much is at stake because there's no
central exchange or system for reporting trades."
October 9 - Bloomberg (Gavin Finch and Ben Sills): "Danilo Coronacion oversees
15% of global coconut oil production at CIIF Oil Mills Group in the
Philippines. These days, he spends a lot of time worrying about events half a
world away in London. The name of his pain? Libor. CIIF has more than $60
million of debt, or 70% of its working capital, linked to London interbank
offered rates that have soared since Lehman Brothers ... collapsed ... The cost
of borrowing in dollars overnight in London jumped 1.44 percentage points
yesterday to 5.38%... Rising Libor, set each day in the center of international
finance, means higher payments on financial contracts valued at $360 trillion -
or $53,500 for each person worldwide --including mortgages in Britain, student
loans in the US and the debt of companies like CIIF in Makati City, the
Philippines."
October 6 - Bloomberg (Scott Lanman and John Brinsley): "Federal Reserve
Chairman Ben S. Bernanke may find the next fronts of the financial crisis to be
just as chilling as last month's downfall of Wall Street titans: its spread to
corporate America and state and local governments. Companies from Goodyear Tire
& Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are
being forced to tap emergency credit lines or pay more to borrow ... California
Governor Arnold Schwarzenegger says his and other states may need emergency
federal loans as funding dries up. A cash crunch on Main Street would endanger
companies' basic functions - paying suppliers, making payrolls and rolling over
debt."
October 9 - Bloomberg (Denis Maternovsky): "Developing nations' borrowing costs
jumped to the highest in five years relative to US Treasuries ... The extra
yield investors demand to buy emerging-market bonds surged 71 bps 6.07
percentage points ... The yield jumped 167 bps this week, the biggest weekly
increase since Sept. 1998."
October 10 - Bloomberg (Neil Unmack and Oliver Biggadike): "The cost to protect
corporate debt from default soared to records around the world on investor
concern that the deepening credit crisis will trigger rising failures as
companies struggle to finance their businesses. Credit-default swaps on the
Markit CDX North America Investment Grade index, linked to 125 companies in the
US and Canada, jumped 8 bps to 206 bps ... "
October 10 - Bloomberg (Caroline Hyde): "The value of US and European high
risk, high-yield loans fell to a record low ... The Markit LCDX index of
credit-default swaps on US leveraged loans, which falls as credit risk
increases, dropped 1.5 percentage point to 83.75% of face value, according to
Goldman Sachs ... "
October 9 - Bloomberg (Sree Vidya Bhaktavatsalam): "Investors pulled a record
$72 billion from US -managed stock and bond mutual funds in September ...
Shareholders took $43.5 billion from stock funds last month and $28.8 billion
from bond funds ... "
October 7 - Bloomberg (Pierre Paulden): "McClatchy Co., Building Materials
Holding Corp. and almost 100 other companies across the US are suffering
payback from lenders stung by at least $112 billion of losses in the loan
market. Banks and investors who are losing money on the record $1.7 trillion of
high-yield, high-risk loans made in 2006 and 2007 are charging borrowers an
average of 1.64 percentage points more in interest to amend borrowing
agreements and avoid default, according to S&P. That's the highest since
1997 and almost eight times more than the first half of last year."
October 8 - Bloomberg (Esteban Duarte): "The European Central Bank said it
increased lending to banks in Europe last week to the highest level since Jan.
1. The ECB loaned banks 635.1 billion euros ($864 billion) through monetary
operations, up from 487.31 billion a week earlier..."
October 9 - Bloomberg (Poppy Trowbridge): "The British government may own as
much as 30% of four of the country's biggest banks as it doles out the 50
billion-pound ($87 billion) lifeline announced yesterday, according to analysts
at Sanford C. Bernstein Ltd. Prime Minister Gordon Brown and Chancellor of the
Exchequer Alistair Darling offered to buy preference shares to help boost
capital at Royal Bank of Scotland Group Plc, Barclays Plc, Lloyds TSB Group
Plc, HBOS Plc and four other lenders in the unprecedented rescue plan."
October 6 - Bloomberg (Tasneem Brogger and Christian Wienberg): "Denmark
guaranteed all bank deposits in an agreement funded by the country's commercial
lenders, becoming the latest European nation to bolster the stability of its
financial markets."
October 9 - Bloomberg (Tasneem Brogger): "Iceland's government seized control
of Kaupthing Bank hf, the nation's biggest bank, completing the takeover of a
banking industry that has collapsed under the weight of its foreign debt ...
The banks are saddled with about $61 billion of debt, 12 times the size of the
economy ... "
October 7 - Bloomberg (William Mauldin): "Russian President Dmitry Medvedev is
tackling the country's worst financial crisis since the 1998 default by
providing almost $200 billion for banks, builders and energy producers."
October 7 - Bloomberg (Lyubov Pronina): "Russia's government should lend the
country's biggest banks 950 billion rubles ($36 billion) for at least five
years to help unfreeze credit markets, President Dmitry Medvedev said."
October 8 - Bloomberg (Alison Vekshin): "The volume of large, syndicated loans
rose a record 22.6% last year, reflecting a 'merger and acquisition financing
boom' through the first six months, US regulators said. An 'inordinate volume'
of loans had 'structurally weak underwriting,' particularly in non-investment
grade or leveraged transactions, according to the Shared National Credits
report ... "
October 10 - Bloomberg (Christine Richard): "MBIA Inc. may end up operating a
tunnel in Australia because the project probably won't be able to make payments
on debt that the bond insurer guaranteed. Plans to refinance the Lane Cove
Tunnel in Sydney and restructure its debt haven't succeeded ... Traffic remains
below forecasts and the toll project isn't expected to meet its debt service
payments without help from MBIA later this year, Moody's said. Under
bond-guarantee terms, MBIA has the right to take control of the project ... "
Currency Watch
October 10 - Bloomberg (Kim-Mai Cutler and Andrew MacAskill): "The yen headed
for its biggest weekly gain in a decade against the dollar as the global
stock-market rout caused investors to sell higher-yielding assets funded with
the Japanese currency ... "
October 6 - Bloomberg (Belinda Cao): "China should prepare for a fall in the
dollar and reduce the rate of the yuan link to the US currency, a government
economist said in an article published in the China Securities Journal today.
The US government may print more money to stimulate the economy if the slowdown
continues, which may cause a 'big' depreciation in the dollar, said Ba Shusong,
an economist at the Development Research Center of China's State Council."
Panic selling overwhelmed the currency markets, as the dollar index jumped 3.3%
to 83.0. For the week on the upside, the Japanese yen gained 4.6%. For the week
on the downside, the Australian dollar declined 16.9%, the Mexican peso 14.0%,
the Brazilian real 11.6%, the South African rand 10.4%, the New Zealand dollar
10.1%, the Canadian dollar 7.7%, the South Korean won 5.9%, the Norwegian krone
4.6%, the British pound 3.8%, and the Euro 2.6%. Examining the ongoing rout in
some of the "emerging" currencies, this week the Mexican peso dropped 14.0%,
the Chilean peso 10.6%, the Turkish lira 8.3%, the Polish zloty 7.9%, the
Hungarian forint 7.8%, and the Colobian peso 7.1%.
Commodities Watch
What an ugly liquidation. For the week, gold prices swung in a range of over
$100, before ending the week up 1.4% to $847. At one point today, silver was
down over 20%, before closing the week with a 10.5% loss to $9.97. November
Crude sank another $13.61 to $80.27. November Gasoline dropped 16.4% (down
24.8% y-t-d), and November Natural Gas declined 9.6% (down 11.2% y-t-d).
December Copper sank 19%. December Wheat dropped 12% and Corn fell 10%. The CRB
index dropped 11.2% (down 19.2% y-t-d). The Goldman Sachs Commodities Index
(GSCI) sank 13.9% (down 17.6% y-t-d).
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