- Barak Obama announced that the US budget deficit will quadruple to $1,750 billion in 2009 or 12.3% of GDP (the highest since WWII). You bet the deficit will be larger when stimulus plan n°2 will be announced later during the year together with a downward revision of GDP.
- Saturday, Ireland announced that the €18 billion hole in public finances (the national debt will reach 45% of GNP – no so bad compared to many other European countries…) will be addressed via tax increases. This is the first country to announce it; many will follow in the years to come to plug fast growing deficits which, before the crisis, were already too large in many countries (add social security and other public deficits and you get the picture) . Watch prices of Government bonds, the next bubble to deflate.
- Wall street at the lowest for 12 years, just over 50% down from its peak in October 2007. There are $3.000 billion sitting in money market funds and, despite the zero or near-zero return, there no sign that some will find their way to the equity markets. True technical indicators are pointing to an oversold market, but S&P earning downgrades (we are at -40%, Goldman Sachs forecasts -56% for this recession vs -79% during the great depression) is not abating and in this environment sentiment is king.
- Citigroup gets $52.5 billion capital from the US Government and GSIC (Government of Singapore Investment Corp) conversion of preferred shares into common stock, the US ending up with 36% of the share capital. Will this be enough? One may doubt with mounting non-performing loans (and what is the value of all these so-called toxic assets?) and no quick economic recovery in view. Even more if, as it seems the case, the US authorities are going to closely look at the TCE (Tangible Core Equity = common stock) instead of Tier 1 (that counts preferred shares – shares you said? no, low ranking debt). According to Bloomberg banks have so far written down $1,100 billion and raised $1,000 billion, i.e. $100 billion equity capital shortfall (prior to the Citigroup preferred shares conversion). We have not seen the end of it.
- HSBC plans to shore up its capital reserves by cutting its dividend and raising £12.6 billion via a right issue on Monday (the largest ever in the UK) despite a £15 billion profits expected for 2008 (-11% compared to 2007) according to analysts at Keefe, Bruyette and Woods. HSBC either is expecting substantial more losses coming from toxic assets in their US operation and additional losses stemming from a weakening economy, including in Asia, or/and the need to compare favourably to banks that have received and continue to receive funds from Governments that might lead to competitive distortions. This leads to questions concerning the way banks are helped with loans, preferred shares, convertibles, you name it, and no direct equity but for a few exceptions (Citicorp seems to open the way to more direct governments’ involvement at the TCE level)
- Eastern Europe? No bail-out! decided the European leaders during an emergency summit meeting on Sunday 1 March in an other display of strong unity and well coordinated economic policy during this crisis. The joint declaration is offering nothing new beyond rhetoric (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/106390.pdf). If the crisis in Eastern Europe is as deep as some analysts are forecasting, hiding behind rhetoric (“getting the real economy back on track by making the maximum possible use of the single market, which is the engine for recovery.”) and waiting that things gets much worse to act reminds me of the inaction of Governments between August 2007 and September 2008. I will discuss the subject of Eastern Europe crisis in a forthcoming article.
- Next week: watch the Initial Jobless Claims and the ISM Manufacturing numbers in the US where the consensus is 33.5 (35.6 prior) and -640,000 (-598,000 prior).
Markets & Beyond - An Independent View 