Global Deleveraging Has Set In:
Real Global Credit Growth Set To Halve From Last Year And Shrink Further in 2009
* Oct 21 Fitch: The financial crisis will halve real growth in credit this year as financial firms reduce leverage, investors' appetite for risk declines and the worldwide economy slows. In particular, real global credit growth, which peaked at almost 16 percent in 2007, will slow to 7 percent by year-end and shrink to nearer 5 percent next year. ''The slowdown will continue to be most pronounced in emerging Europe but will spread to all regions."Oct 13: George Magnus: Even if a financial meltdown is averted, we should be under no illusion that the deleveraging in the financial and household sectors will stop. As a result, four big battlegrounds remain. First, there is a high possibility of further bouts of financial stress and failures. Money markets are still broken and recovery will take time. Second, illiquidity, a preference for cash-type instruments, even over government bonds, and a considerably exÂpanded supply of government bonds raise the threat of an untimely increase in bond yields. Third, the global recession that has started may yet turn out to be sharper than expected â€“ and certainly longer. This will bring sustained, and some new, credit risks. Fourth, much slower growth and the risk of some home-made financial crises in emerging markets warrant close scrutiny.
* Roubini before coordinated G7 action: Urgent and immediate necessary actions that need to be done globally include:
1) another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
2) a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
3) a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
4) massive and unlimited provision of liquidity to solvent financial institutions;
5) public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
6) a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
7) a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
8) an agreement between lender and creditor countries running current account surpluses and borrowing and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.
* Total U.S. credit market debt as % of GDP started to shoot up in the early 1980s and reached 350% of GDP in 2008. The only other spike in the series is in the 1930s during the Great Depression--] this series tends to be mean-reverting, meaning that deleveraging from current record levels could be protracted and painful. (nc)
* Bill Gross: What Happens During Deleveraging? 1) All risk spreads go up; 2) Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium; 3) Raising sufficient capital depends on new sources of liquidity (or balance sheets) coming in; absent that, prices of almost all assets will go down--] only new source of liquidity available on the scale needed for a bull market anywhere is the Treasury. (Bill Gross at PIMCO)
* Frank Veneroso (via NC): The bursting of the commodities bubble will be the last one after Japan, Asia, technology, housing--] serious deleveraging process around the corner.
* McCulley (PIMCO): if all financial institutions deleverage at the same time the result is macroeconomic asset deflation--] only medicine is governement sponsored countercyclical intervention with both fiscal and monetary measures--] ensuing fiscal deficit is lesser evil!
* Satyajit Das: ABS CP conduits, SIVs and CDOs are being gradually dismantled and the assets returning onto bank balance sheets. Hedge funds have been forced to reduce leverage by between a third and a half times. Prime brokers and banks have significantly tightened credit, increasing the level of collateral needed even against high quality assets. Each 1 times leverage reduction in hedge fund leverage represents in excess of US$2 trillion of assets. This accelerates the de-leveraging process.
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