FYI | Oct 08 2008
By Greg Peel
Over the last two trading sessions, shares of British banks have undergone spectacular collapses from already knocked down levels, threatening bankruptcy and economic disaster for the UK. Last night shares in the Royal Bank of Scotland fell 40% to add to a previous 20% fall, and shares in Halifax Bank of Scotland have halved in two days.
British prime minister Gordon Brown has been forced to act swiftly to prevent such a disaster, last night ordering a 30-50 billion pound emergency taxpayer-funded capital injection directly into the banks themselves. The move is expected to be executed through the purchase of preferred stock, with generous dividend and profit share arrangements for the taxpayer also expected to be put in place. An announcement is anticipated before the open of the London markets tonight.
This particular strategy is one much touted by the US Congress prior to the passage of the Troubled Asset Relief Program bill last week. It is understood the US$700bn package finally approved allows for this option to be partially or fully implemented as an alternative to buying toxic assets, if necessary. However, as the strategy amounts to a partial nationalisation of the banking system, Republicans in particular are none too keen.
Not so the British, and clearly in this case parliamentary approval is not required. The Financial Times reports further provisions may be added, including government representation on bank boards, caps on bank executive remuneration, and another pool of funds to ensure ongoing day-to-day operation.
This is the stuff of desperation, and yet another indicator of just how grave the global banking situation has become.
Last night Iceland took over its second largest bank and moved to prop up its own battered currency. As a high interest rate payer, the Icelandic krona has long been a favoured carry trade in a similar fashion to the Aussie dollar. Iceland is not a member of the EU. And like the Aussie, the krona has now been trashed. The country of 300,000 people is facing national bankruptcy and a loan from Russia is also being sought. Using powers enacted on Monday the Iceland government last night dismissed the board of Landsbanki and put the bank into receivership.
Russia has been forced to suspend its own stock market on more than one occasion this past week to avoid bank stock disaster. Last night the Kremlin announced US$36bn of five year credit for Russian banks to be channelled through the two big state-owned institutions Sberbank and VTB.
The leaders of the European Union met again last night in an attempt to seek a united plan to mirror the actions of non-member states. The European Central Bank does not have the power to conduct pan-European bail-outs and the EU has always left it to each member to sort out their own systems under EU law. But when Ireland did exactly that without consultation last week, all hell broke loose.
Ireland independently moved to guarantee deposits at its banks. This forced a meeting of the Big Four EU leaders to attempt to coordinate a pan-European plan, given if some members match Ireland and others don’t, the risk is a run on those banks with no guarantee as money is shifted across borders to safety. However, Germany would not agree to a union-wide measure and immediately moved to match Ireland, forcing other members to scramble to do the same.
As it stands, the EU would like all countries to provide 50,000 euro guarantees on deposits but as yet no agreement has been reached. The more time is expended, the more Europe fractures, and the greater the risk of disaster.
The world is still hoping central banks will join in a coordinated rate cutting program, but as yet there has been no confirmation of such. US and European commentators took the Reserve Bank of Australia’s shock 100 point cut to be a clue to such a plan, suggesting the RBA’s move smacked of more to come from elsewhere. However, while last night US Federal Reserve chairman Ben Bernanke hinted at the possibility of a rate cut, that was all he did. Japan left its rate on hold this week, but at 0.5% there’s really little room to move. There is a strong call for the Fed to cut from 2% to 1%.
And there’s a strong call for both the Bank of England (5%) and the ECB (4.25%) to be even more aggressive. The BoE meets tonight, but the ECB left its rate unchanged – to much astonishment – last week. It is not scheduled to make another decision until next month. The Fed’s next scheduled meeting is in three weeks.
The economists at Standard Chartered expect cuts from the BoE and ECB and will not rule out a cut from the Fed. But if no action is taken soon, say the economists, “there is a severe risk that easing comes too little, too late to prevent a prolonged economic downturn across Europe”.
