The bailouts continue, either of banks and financial systems in France and Sweden, or of countries, with struggling Iceland and Pakistan reported to be in deep negotiations on multi-billion dollar rescues. And, we have a new contender for the gold medal for stupidity in financial markets.
Governments around the world, including Australia, revealed rescue plans for their banks and economies, but a large number of emerging economies were hit hard as wholesale funding dried up and the countries staggered to the brink of default.
Iceland was first cab off the rank, with Pakistan, Latvia, Turkey, Hungary and the Ukraine close by in the list of countries most like to go flop.
Three big banks were taken over in Iceland and billions of dollars in debts triggered, taking the country closer to the brink. But talks with the International Monetary Fund now seem to have pulled the country back and there are media reports in Europe this morning that a $US6 billion rescue package, led by the IMF and backed by a number of other central banks, is close to agreement.
The Financial Times reported that the IMF will put up $US1 billion, with central banks from the Nordic region and Japan contributing the rest. It is not known whether Russia will participate in the rescue plan. Iceland approached Russia earlier in the month for a $US5 billion loan, but nothing eventuated. Russia has its own problems with some $US200 billion injected into banks, stockmarkets and other financial groups to try and stop a plunge in shares and the currency. Tens of billions of dollars in foreign investment has left the country in the wake of the invasion of Georgia.
The FT and other media groups in Europe also say that Pakistan has started informal talks with the IMF for an assistance package that could total $US10-$US15 billion. But sensibilities need the talks to be low key, given the rising anti-western feeling in the country.
Around half the assistance could come from the IMF, with the rest being provided by the World Bank, the Asian Development Bank and donor countries such as Saudi Arabia and perhaps China (Pakistan had sought loans from both countries).
Pakistan has yet to make a formal request for IMF support, amid reservations among some senior political figures that it would be a blow to national pride and fears the sort of budget cuts would spark unrest, especially if subsidies were cut.
After South Korea on Sunday revealed a $US130 billion in total plan to help its banks resume lending, support the currency and halt the slide in the economy, Sweden has followed with a $US207 billion program to boost liquidity in its financial system and take shareholdings in banks if need be.
Sweden is a member of the European Union but not in the eurozone. Its banks have avoided no liquidity or capital problems so far, but there are concerns they might be impacted by decisions made in other countries. The Swedish plan was introduced for much the same reasons as Australia’s plan was last week.
Swedish banks have high exposure levels to struggling economies around the Baltic, including Latvia, Estonia and Lithuania. Sweden’s banks control two-thirds of total lending in the former Soviet states (Again, like Australian banks dominate the NZ financial system). The prices of some big Swedish banks have fallen sharply as doubts have grown about the economic outlook for the three Baltic countries, especially Latvia.
The package includes a $US205 billion liquidity boost and a separate $US2 billion fund available to takes stakes in banks needing a capital boost. The country has a deposit guarantee system which it further raised earlier this month.
And France overnight revealed a $US14 billion fund that will take stakes in six of its major banks. The French government will invest 10.5 billion euros ($13.99 billion) in the country’s six biggest banks by year-end on condition that they increase lending to companies and households.
The government will subscribe to subordinated debt issues by BNP Paribas, Credit Agricole, Societe Generale, Credit Mutuel, Caisse d’Epargne and Banque Populaire, without acquiring voting rights.
The country’s Finance Minister, Christine Lagarde, said at a Paris press conference that the goal was to ensure the bank networks will be able to continue financing the economy while maintaining the high solvency levels they have today. Lagarde said the banks “must commit to increasing loans to the economy and guarantee financing adapted to the needs of households, companies, and local government.”
The French government last week said it will set up two entities, one that will lend up to 320 billion euros to banks and another that will spend as much as 40 billion euros to take equity stakes in banks, if need be.
And finally, reports overnight of a new contender for the gold medal for stupidity in banking and finance. The holder, won only Friday, is the French mutual savings bank Caisse d’Epargne which incurred losses of 600 million euros (around $A1.08 billion) when four traders speculated the stockmarket would rise, only to watch it fall sharply at the start of the month. They had been told not to speculate, but the gold medal was for the management and board allowing any speculation to occur. management and the chairman have been sacked.
Now a new contender, one of the most high profile of the Chinese government business arms: Citic Pacific, based in Hong Kong.
It’s facing billions of dollars in losses after traders made what the company claimed were unauthorised one-way bets against the US currency, which included going “long” in Australian dollars, which then promptly plunged.
Citic Pacific is the Hong Kong-listed arm of China International Trust and Investment Corp and has for years been one of the country’s commercial ears and eyes on the world as China has improved its financial sophistication. Citic has an arm that is a big resources trader and investor, especially in Australia. Now it says it has potential foreign exchange losses of about $US2 billion.
The company says its group finance director and group financial controller have quit over the losses.
Citic Pacific’s Chinese parent has pumped in another $US1.5 billion to strengthen its position. The losses could rise or fall depending on the US dollar’s performance against the Australian dollar and euro until the end of the year, when Citic Pacific must mark-to-market for reporting purposes.
The Financial Times reports that under the contracts, Citic Pacific is obliged to buy Australian dollars and euros at prices of A$1:US$0.87 and €1:US$1.44. With the Australian dollar currently trading at US$0.70 — and the euro at US$1.35 — both contracts are under water.
“At current mark-to-market prices, Citic Pacific faces a loss of US$1.88bn, with most of its exposure to the Australian dollar. Since peaking at US$0.98 in the middle of July, the Australian dollar has fallen almost 30 per cent to US$0.70. The company has terminated some of the contracts at a loss of US$103.6m.”
“Citic Pacific’s losses may continue to mount over the life of the contracts, with the company committed to buy A$9.05bn in monthly instalments up to October 2010.”
Oh, dear.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.