Denial Of Reality Becoming Impossible
The game of pretending that the world banking system and national governments are solvent becomes more difficult by the hour.
The true magnitude of the write downs that the banking industry needs to take to reflect the reality of asset impairment was highlighted by the Royal Bank of Scotland. Pretending that the losses do not exist is no longer worth the effort since no one is fooled anymore. There can be no recovery in bank lending unless impaired assets are written down and sufficient amounts of new capital are raised. This is the point at which things get interesting since the capital markets are not open to the banks; the lender of only resort to the banking industry are the world’s central governments. The really scary question now is whether the central governments have the financial capacity to recapitalize the banking industry (along with everyone else) without resorting to printing money on a grand scale.
Far from being contained, as some have proclaimed, the banking crisis continues to expand. The debate is no longer focused on whether the banking industry is solvent. The real question is whether central governments can contain the economic meltdown.
Consider the size of losses reported by Royal Bank of Scotland and the excuses and comments by RBS Chief Executive Stephen Hester.
LONDON — Royal Bank of Scotland Group PLC said Monday that tough market conditions in the fourth quarter and mounting impairment charges could push it to a 2008 full-year loss of as much as £28 billion ($41.29 billion), the U.K.’s biggest ever corporate loss.
The government currently owns just under 58% of RBS after last year underwriting a £15 billion rights issue that saw little take-up by existing shareholders.
The move means RBS will now have to pay back less to the government, but it has also to agree to boost lending to consumers and businesses. The Monday update comes ahead of the announcement of its 2008 results on Feb. 26.
RBS Group Chief Executive Stephen Hester said: “The dislocation of credit markets and the global economic downturn continue to hit RBS hard, as with many other banks.
“We are making progress in recognizing excess risk and dealing with it. Significant uncertainties and risks inevitably remain.
“In this context, the support we are receiving from the government benefits all our stakeholders and enables us to provide more customer support in return.”
“With enhanced core capital, removal of the preference share dividend and the prospect of further asset and liquidity measures, RBS is able to continue its strategic restructuring purposefully,” he added.
What Chief Executive Hester is really saying is that he managed RBS poorly and took ridiculous lending risks; no one will buy our shares or debt securities and we need a government bailout to prevent closing the bank. Nonetheless, we now recognize “excess risk” and are ready to start lending again once we receive government funding.
Hester should be fired for incompetence – he dissipated investor money and bank capital and now wants to try his hand with government supplied funding.
The question of how the British Government will raise the funds to bail out RBS is answered by The Telegraph.
Under the scheme’s terms, the Bank will be able to buy assets including corporate bonds and commercial paper, a move which Mervyn King, the Bank’s Governor, called “an important additional tool to improve financing conditions in the economy”.
The asset purchase facility does not in itself amount to quantitative easing or “printing money”, because the scheme initially will be financed by Treasury Bills and does not involve an increase in the money supply.
However, the Treasury has given the Bank’s Monetary Policy Committee the option to go down that road by extending the scheme at a later date and paying for assets with what amounts to newly created money and not Treasury bills. Quantitative easing is a more unconventional tool available to the Bank beyond interest rates as it attempts to halt the pace of economic decline in the UK.
“This does not mean that quantitative easing will definitely happen, but does allow the MPC to move fairly quickly if they want to,” he said.
Ross Walker, economist at Royal Bank of Scotland, said: “This framework could readily evolve into full-blown quantitative easing – we would expect it to do so given the proximity of Bank Rate [to zero] and deteriorating economic conditions, perhaps as soon as March/April.”
I agree with Ross Walker – full blown money printing will occur as demands on the British treasury continue to explode in size. The British Government, approaching the limits of their borrowing capacity, will come to the rescue of RBS and others by printing money. At this point, no one is even trying to pretend that RBS is solvent or that the British government can bailout every failing enterprise. The end result will be a catastrophic destruction of confidence world wide. When governments’ last resort is to print money, one can sense that the end of the old order is near.
Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.
Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.
A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece’s social fabric is unravelling before the pain begins, which bodes ill.
This week, Riga’s cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia’s finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.
“Trust in the state’s authority and officials has fallen catastrophically,” said President Valdis Zatlers,
who called for the dissolution of parliament.
Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year’s end.
Private economists fear 25pc before it is over. Spain’s wage inflation has priced the workforce out of Europe’s markets. EMU logic is wage deflation for year after year. With Spain’s high debt levels, this is impossible.
Italy’s treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome’s throat. Italian journalists have begun to talk of Europe’s “Tequila Crisis” – a new twist.
Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up “roll-over risk” for later in the year. Hedge funds are circling.
Printing money, a self destructive tactic is the last option left to the governments mentioned above. Expect major social unrest in these countries as their governments collapse the national wealth through the printing press.
LONDON (Reuters) – Societe Generale said on Thursday that the United States’ economy looks likely to enter a depression and China’s could implode.
In a highly bearish note, veteran cross asset strategist Albert Edwards said investors should now cut equity exposure after a turn-of-the-year rally and prepare for a rout.
He predicted that the S&P 500 index of U.S. stocks could be set for a fall of around 40 percent from recent levels.
“While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere,” Edwards wrote.
“It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.”
Edwards has long been one of the most bearish analysts in London, first with Dresdner Kleinwort and then with SocGen.
The world Central Governments are resorting to the nuclear option – printing money – in a last attempt to hold the financial system intact. Had they allowed selected major bankrupt institutions to fail, severe financial pain would have been inflicted on many. The strategy of attempting to save all bankrupt industries with printed money will result in worthless currencies worldwide, thereby guaranteeing financial ruin for all.