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HomeFelix Rohatyn Promotes a Domestic IMF
Posted by Larry Doyle on April 13th, 2010 8:53 AM |
Given the massive budget gaps and pension shortfalls encompassing a large swath of our municipal landscape, should our nation think about launching a domestic version of the IMF (International Monetary Fund)? If we were to listen to the wise old Wall Street veteran and Washington confidante Felix Rohatyn, we should do just that.
Rohatyn, a senior investment banker at Lazard Freres, was heavily involved in the restructuring and recapitalizing of New York City during its fiscal nightmare back in the 1970s. He is not bashful in stating that a domestic IMF may very well be necessary to address our current municipal deficits. (more…)
Revisiting the Weakest Link
Posted by Larry Doyle on October 7th, 2009 12:44 PM |
Are all regions of the world improving? Will Asia lead the globe to greener pastures and brighter days? Well, if so, the trek through the fields will not be easy and we will encounter many storms along the way.
While Australia’s raising rates yesterday is an indication of an improving economy in that country, as one moves out of Asia into eastern Europe we encounter a decidedly different dynamic. Let’s revisit the ‘weakest link,’ that being Eastern Europe in general and the Baltic nation of Latvia specifically.
I initially addressed the economic weakness in this part of the world last February in writing, “The Weakest Link.” Today, we learn that Latvian Currency Scare Rattles Markets:
The Swedish krona and a range of eastern European currencies have tumbled as Latvia appears to edge closer to devaluing its currency.
In a re-run of the last major devaluation scare, Latvia failed to attract any bids for one of its treasury bill auctions earlier Wednesday. The country’s treasury received no bids for its offer to sell eight million lats ($16.7 million) of paper maturing in April 2010.
The poor auction results are the latest sign of economic stress in the Baltic nation, where the government is struggling to meet budget cuts required by the International Monetary Fund, the European Union and other bilateral lenders in return for aid.
The Swedish krona, linked to Latvia through Sweden’s large banking exposure to the country, tumbled as news of the failed auction emerged. The euro extended earlier gains to reach a peak at SEK10.3670 against the krona.
Meanwhile, Europe’s emerging market currencies, which often suffer from nerves over risk when Latvia’s problems intensify, also fell.
The euro soared to over HUF269 against the highly risk-sensitive Hungarian forint, from under HUF267 at the start of the day. The euro also swept to over PLN4.24 against the Polish zloty, from a low of PLN4.18.
The Turkish lira and, to a lesser degree, the Czech koruna, also weakened. The failed bond auction was “not good news,” said Nigel Rendell, a European emerging markets strategist at RBC Capital Markets in London.
“It has all the makings of the final chapter in the Latvian story,” he added. In credit markets, the cost of insuring Latvian sovereign debt against default continued to climb from recent levels, in a sign that investors are increasingly uncomfortable with the outlook for the country. Regional peers Lithuania and Estonia, which also peg their currencies to the euro, saw their swaps spreads widen.
Still, the debt and currency markets shouldn’t be overly troubled by Latvian devaluation risk, as the threat has been building for some time, and the global financial markets are now much more robust than they were several months ago.
“If they did devalue, there would be a selloff [in eastern European assets], but the impact would not be as severe as it would have been six to nine months ago,” said Mr. Rendell at RBC. “If we had big currency moves, I think people would buy them back,” he added.
Devaluation is also unlikely to catch the Swedish banks off guard. To brace for the potential onslaught of defaulting customers, both Swedbank AB and Skandinaviska Enskilda Banken AB have set up Baltic units to deal with problem loans and seized collateral.
While officials may care to discount the impact of a full blown devaluation of the Latvian currency, the interconnectedness of the global markets has proven to be more of a risk propellant rather than a risk mitigant. How so? The use of derivatives across currency and credit markets has been shown to be as much speculative in nature as pure hedging. In fact, there certainly are market participants who will benefit by a Latvian devaluation.
Can that devaluation, if it does occur, be well contained?
I’ll be watching.
LD
Related Sense on Cents Commentary
Let’s Cross the Pond and Revist the Weakest Link (May 23, 2009)
GDP Projections from IMF, CBO, OMB
Posted by Larry Doyle on July 8th, 2009 12:05 PM |
For those not familiar with the acronyms of the organizations referenced in the title of this post:
IMF: International Monetary Fund
CBO: Congressional Budget Office
OMB: Office of Management and Budget, which operates within the White House
This morning the IMF released their updated Global Economic Prospects.
I will share with you the projected growth rates for the United States against those provided by the CBO and OMB. I will then provide some comparative analysis.
United States
IMF -2.6% (2009) .8% (2010)
CBO -3.0% (2009) 2.9% (2010)
OMB -1.2% (2009) 3.2% (2010)
The figures provided by CBO and OMB were projections from the 1st quarter 2009. As you can see, the White House projections forecasted by the OMB are wildly optimistic both for this year and next relative to the IMF and CBO.
Those projections play directly into projected tax revenues and then, in turn, to the level of the federal deficit. If the IMF’s current projections are anywhere close to being accurate, our deficit will be significantly worse than previously forecast. What does that mean?
HIGHER TAXES ACROSS THE BOARD!!! What happens then?
SLOWER GROWTH GOING FORWARD!!!
In regard to the rest of the globe, the IMF’s projected numbers speak volumes:
China 7.5% (2009) 8.5% (2010)
Euro Area -4.8% (2009) -.3% (2010)
Japan -6.0% (2009) 1.7% (2010)
India 5.4% (2009) 6.5% (2010)
Emerging/Developing 1.5% (2009) 4.7% (2010)
Economies
Advanced Economies -3.8% (2009) .6% (2010)
Global -1.4% (2009) 2.5% (2010)
Bloomberg provides a review of the IMF report, IMF Sees Stronger Global Rebound From ’09 Recession. I would question the accuracy of Bloomberg’s title. I see a wide divergence between growth prospects in the BRIC nations and emerging markets from those of the advanced economies, especially with Europe and the United States. Bloomberg reports:
Still, risks to the outlook, which have “diminished noticeably,” are still “tilted to the downside,” the fund said, citing a possible downward pressure on asset prices resulting from rising unemployment, pressure on bond yields from concerns on public debt, and emerging economies’ vulnerability to financial stress.
A larger-than-expected drop in risk aversion and stronger demand in emerging economies could offer “some upside risk” that boosts growth, according to the fund.
In a separate report today on the state of the global financial system, the IMF said that while financial markets and confidence in an economic recovery have improved since April, risks remain and policy makers must remain vigilant until a sustained recovery is under way. Credit risks are high, bank lending to the private sector is slowing and the recovery so far has been dependent primarily on public funds, the fund said in an update to its Global Financial Stability Report.
Can the emerging economies of the world pull the developed countries out of the ditch? Will the global economies decouple? Is there any surprise why countries are pursuing protectionist measures?
In regard to the United States, President Obama may want to have the members of his economic team, including Secretary Geithner, Larry Summers, and Peter Orszag, call John Lipsky at the IMF and ask him what he sees.
Risks remain extraordinarily high.
LD
“IMF Puts Financial Losses at $4.1 Trillion”
Posted by Larry Doyle on April 21st, 2009 9:57 AM |
The FT provides in depth analysis as IMF Puts Financial Losses at $4.1 Trillion. The IMF had forecast these losses earlier this month. The actual report is no better than the initial warning. The simple fact is the world is awash in excessive debt. This debt can be restructured, defaulted, and/or devalued. Each of these respective approaches will take time and money. While the IMF has a checkered reputation, I had the good fortune of working at JP Morgan with John Lipsky, current First Deputy Managing Director at the IMF, and hold him in very high regard. Lipsky is often the public face to the markets for the IMF given his reputation.
The FT report is fairly comprehensive, although I still question the relative amount of losses outside of the U.S., Europe, and Japan. Is there anyplace in the world to truly hide in the face of these losses? Can China single-handedly be the economic engine for the global economy? The FT does a great service in shedding light on this report. (more…)
The Weakest Link is Weakening
Posted by Larry Doyle on March 2nd, 2009 6:00 AM |
The other day I highlighted the fact that 12 eastern European countries would solicit a bailout from the European Union over the weekend in Brussels. I defined this bloc of eastern European countries as currently the Weakest Link in the global economy. Well, if they were the weakest link then they just got weaker as they were rebuffed in their request for aid.
The dynamic at work in the weekend’s emergency meeting held in Brussels is a play on beggar-thy-neighbor policies implemented during times of economic stress.
There are actually a number of factors influencing the European Union’s refusal to provide bailout money to these eastern European nations. Included in these factors are the following: (more…)
