Here's my top 10 links from around the Internet at 10am. I welcome your suggestions in the comments below.
1. The IMF has almost doubled its forecast for global financial institution losses to US$4 trillion and warned that 'zombie' banks must be recapitalised, possibly through bank nationalisations, to get them lending again. Here's two of the more worrying paragraphs from the (12 page!) executive summary of the Global Financial Stability Report (GFSR), which is well worth a read. Here's the link to the full 240 page report if you're not time poor. I couldn't help myself and started reading. A cracker.
Without a thorough cleansing of banks' balance sheets of impaired assets, accompanied by restructuring and, where needed, recapitalization, risks remain that banks' problems will continue to exert downward pressure on economic activity. Though subject to a number of assumptions, our best estimate of writedowns on U.S.-originated assets to be suffered by all holders since the outbreak of the crisis until 2010 has increased from $2.2 trillion in the January 2009 Global Financial Stability Report (GFSR) Update to $2.7 trillion, largely as a result of the worsening base-case scenario for economic growth. In this GFSR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $4 trillion, about two-thirds of which would be incurred by banks.
There has been some improvement in interbank markets over the last few months, but funding strains persist and banks' access to longer-term funding as maturities come due is diminished. While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large. As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields.
This line is particularly interesting and cuts to the heart of the matter.
This difficult outlook argues for assertive implementation of already-established policies and more decisive action on the policy front where needed. The political support for such action, however, is waning as the public is becoming disillusioned by what it perceives as abuses of taxpayer funds in some headline cases. There is a real risk that governments will be reluctant to allocate enough resources to solve the problem. Moreover, uncertainty about political reactions may undermine the likelihood that the private sector will constructively engage in finding orderly solutions to financial stress. Hence, an important component to restoring confidence will be clarity, consistency, and the reliability of policy responses.
Here's what the IMF says is needed urgently.
Restructuring may require temporary government ownership. The current inability to attract private money suggests that the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares, even if it means taking majority, or even complete, control of institutions.
Here's a key risk: financial protectionism. Luckily for us in New Zealand, there's no sign yet of it coming to Australia. If it does, we are in trouble. Alan Bollard is rightly worried about this.
Pressure to support domestic lending may lead to financial protectionism. When countries act unilaterally to support their own financial systems, there may be adverse consequences for other countries. In a number of countries, authorities have stated that banks receiving support should maintain (or preferably expand) their domestic lending. This could crowd out foreign lending as banks face ongoing pressure to delever their overall balance sheets, sell foreign operations, and seek to remove their riskier assets, with damaging consequences for emerging market countries and hence for the wider global economy. At the same time, recent agreements among the parents of banks in some countries to continue to supply their subsidiaries in host countries with credit are heartening.
2. Here's what the 'rich pricks' on Wall St really think of the backlash against big spending investment bankers who are now gorging on bailouts. They feel like they're being unfairly targeted and they still deserve US$2 mln for doing a job where they have to get up in the middle of the night. Plenty of rope extended in this piece by Gabriel Sherman in New York Magazine. HT Felix Salmon3. Nouriel Roubini gives his view of the global economic outlook and it's not pretty. He's been more right so far than anyone else. Here's a taste of why he thinks the optimists are wrong.
First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects.
Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. The same is true for a sustained recovery of financial markets.
Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms' pricing power and keep profit margins low.
Third, financial shocks will be worse than expected.
At some point, investors will realise that bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms -- such as hedge funds -- will lead them to sell illiquid assets in illiquid markets. And some emerging market economies -- despite massive IMF support -- will experience a severe financial crisis with contagious effects on other economies.
So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.
To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.
4. Here's a fun video about Zombie banks
5. Martin Wolf at FT.com explains why the Green shoots of recovery could yet wither. There's more of a taste of what he's saying below the nice cartoon.
Consider the salient example of the US, on whose final demand so much has for so long depended. Total private sector debt rose from 112 per cent of GDP in 1976 to 295 per cent at the end of 2008. Financial sector debt alone jumped from 16 per cent to 121 per cent of GDP over this period. How much of a reduction in these measures of leverage occurred in the crisis year of 2008? None. On the contrary, leverage rose still further.
The danger is that a turnround, however shallow, will convince the world things are soon going to be the way they were before. They will not be. It will merely show that collapse does not last for ever once substantial stimulus is applied. The brutal truth is that the financial system is still far from healthy, the deleveraging of the private sectors of highly indebted countries has not begun, the needed rebalancing of global demand has barely even started and, for all these reasons, a return to sustained, private-sector-led growth probably remains a long way in the future.
The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring. Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants.