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The Weakest Link

Posted by Larry Doyle on February 27th, 2009 10:45 AM |

It is widely believed that the weakest link in the global economy centers on Eastern Europe. In light of that, the leaders of 12 eastern European countries are holding an emergency economic summit this weekend. From that summit, it is expected that these countries will request an international bailout.

 As of now it appears the countries in greatest degree of stress are Hungary, Ukraine, and Serbia. The expectation is that the group of countries will request the European Union to arrange a $230 billion bailout package. Who would provide the funding? A conglomerate of European Central Banks, the International Monetary Fund, the World Bank, European Investment Bank, and European Bank for Reconstruction and Development.

A major issue for eastern Europe is that their creditors, largely western European banks along with western European countries, are not exactly in great shape themselves. These countries may look to accelerate their entry into the EU and the full adoption of the Euro along with it.

As the pressure and stress builds, the chance of political dislocation also grows.   

For further details on how Hungary Seeks $230 Billion Bailout for Eastern Europe.  I will be monitoring this situation as it develops.  As our global economy is very much interconnected, the increase in sovereign credit risks is a very serious concern. 

LD

Upon Further Review

Posted by Larry Doyle on February 26th, 2009 3:02 PM |

The FDIC just released its 4th quarter 2008 report. Read it and weep . . .

1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders

2. banking industry had first loss in 4th quarter 2008 since 1990

3. troubled institutions rose to 252 from 171 in 3rd quarter

4. banks have taken a total of $750 billion in writedowns on problem assets!!

5. banks have increased loan loss reserves to $69 billion from $32 billion

These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:

 — Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.

 — Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.

 — As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.

 — Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.

LD






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