Friday, August 1, 2008

Horror Movie In UK And EU

Economic Horror Movie In Britain And Eurozone

By Mike "Mish" Shedlock | 21 July 2008

Things are rapidly deteriorating In the US, UK, and the Eurozone. Let's take a look at a couple of top stories starting with Hundreds Of Thousands Face Job Loss In UK, says top economist. Britain's economy is tipping headlong into a recession that could last more than a year and cost hundreds of thousands of jobs, warns Professor David Blanchflower, a member of the Bank of England's interest rate committee, in an interview with the Guardian today.

Blanchflower says the Bank must cut interest rates rapidly to prevent the downturn being too painful, and thinks the UK could be in for a worse time than even the United States, where interest rates have already been slashed and taxes cut to stimulate the economy.

The economist said the recent rises in unemployment are "the tip of the iceberg". The number of people out of work and claiming benefit is 840,000 but the broader measure of unemployment is 1.6 million, 5.2% of the workforce. Blanchflower said it could climb to more than 7%— a figure that would mean several hundred thousand people losing their jobs.

His warning comes days after the chancellor acknowledged that the slowdown could be "profound" and hinted he would change the Treasury's fiscal rules as the slowing economy looks set to bust them. Today a leading thinktank, the Ernst & Young Item Club, says the economic outlook for Britain is like a "horror movie" as a result of the credit crunch and tumbling house prices.

Deflationary Hurricanes In US And UK

I agree with Blanchflower, having previously stated Deflationary Hurricanes to Hit U.S. and U.K. In fact, I believe the US is in deflation now. However, Blanchflower is mistaken if he thinks lower rates are going to be some kind of magic bullet. One look at the US should be proof enough.

Ugly Picture In Eurozone

Ambrose Evans-Pritchard is writing about European Recession Looms As Spain Crumbles. The eurozone is tipping into a deeper downturn than America itself despite the tremors in the US mortgage industry, and may already be in full recession for the first time since the launch of the single currency. Industrial production for the EMU bloc fell 1.9% in May, according to fresh Eurostat data. It is the sharpest one-month decline for the region since the exchange rate crisis in 1992. Officials in Berlin have warned that Germany's economy could contract by as much as 1.5% in the second quarter as export orders crumble.

Industrial output in both Italy and Greece has slumped 6.6% over the past year. Portugal is off 6.2%. "It is a very ugly picture: we're on maximum alert," said Emma Marcegaglia, head of Italy's business federation Confindustria. Rome is now lobbying for a "New Deal" to revive Italy's economy through massive infrastructure projects.

Jacques Cailloux, Europe economist at the Royal Bank of Scotland, said a "reverse decoupling" is now under way as Europe goes down harder than the US— just as it did after the dotcom bust. "There is loss of momentum across the board. We can't exclude a recession," he said.

Spain is now spiralling into the worst crisis since the Franco dictatorship. "The economy is in dire straits," said Dominic Bryant, Spain expert at BNP Paribas. The global economy has clearly peaked [[and is now rapidly sliding down the slippery reverse slope: normxxx]]. Clearly the US, UK, and EU are not prepared for it. Is any country?

NAB In Dire Us Warning

By Ruth Williams and Ari Sharp | 28 July 2008

National Australia Bank has shocked investors by saying it may lose as much as 90% of the value of its US mortgage-backed investments— worth more than $1 billion— and warning that the battered US housing market is poised to deteriorate further. In a horror day, the bank's shares closed down an extraordinary 13.5%; it confirmed its earnings would be hit by almost $600 million; and it faced criticism over conducting an $850 million bond issue the week before the announcement.

"We believe on the basis of detailed analysis that significant loss is now inevitable, and a worse-case provision necessary," NAB chief executive John Stewart said. NAB made a provision for as much as 90% of the value of its portfolio of collateralised debt instruments (CDOs), most of which were derived from US mortgages and rated AAA. NAB had already flagged $181 million in losses, increasing this yesterday by $830 million to $1.011 billion.

NAB still holds a $4.5 billion debt portfolio of mostly European and US corporate loans. Mr Stewart said NAB's capital base remained sound, and its rural US subsidiary, Great Western, had only a small mortgage portfolio and was performing as expected. NAB may be the first bank in the world to almost completely mark down the value of its US mortgage-backed CDOs. "I'm not aware of any major bank organisation in the world that has (made a provision for its) CDOs to 10%," said Peter Quinton, head of research at Bell Potter Securities. "This could have some ricochet globally."

Just $360 million of the CDOs were connected to subprime mortgages— demonstrating that US mortgage depression is spreading into the mainstream market. Mr Stewart said the bank had decided to make a provision for almost all the investments at once rather than "drip-feed" them out. NAB's recent withdrawals from negotiations to buy the Australian operations of Citi and UBS were not connected to the provisions, he said, except that both were the result of deteriorating market conditions. He would not comment on reports that NAB was interested in buying HBOS-owned BankWest.

"What we know now is that we're not at the bottom, and I'm not sure whether this is a clever time to be making acquisitions," he said. NAB's announcement came after a shocking Thursday night on Wall Street, when US financial shares suffered their biggest fall in eight years after house sales dropped and high-profile bond investor Bill Gross warned that $5 trillion of mortgage loans— almost half the home loans in the US— belonged to "risky asset categories".

Mr Stewart was equally pessimistic, saying there were more than 10 million US houses sitting vacant, and some homes were selling for less than half their mortgaged value. Other banks scrambled to clarify their exposure to the US mortgage market. ANZ did not update the market, but a spokesman said its position had not materially changed since its half-year result in May when it made a $226 million provision for its exposure to a US monoline insurer from which it had purchased credit. In November, ANZ said its total exposure to CDOs was just $5.5 million.

CBA said it had a $1.4 billion exposure to two asset-backed commercial paper conduits, but played down the risks , saying they were "highly rated assets". Westpac said its CDO portfolio was small and of "high quality". Other NAB debacles— including the forex scandal and the US HomeSide write-downs— took a significant toll on NAB's reputation, but Mr Stewart denied the CDO provisions would have the same impact. NAB emphasised that the CDOs had been AAA rated, and had passed all the bank's internal risk checks. "AAA means they have a one in 10,000 chance of default," Mr Stewart said. "If we wouldn't invest in AAA assets we wouldn't lend to any companies in Australia."

But Mr Stewart said it was clear that the rating agencies that had assigned the CDOs AAA status had "let the whole industry down". "(They) didn't do a thorough job," Mr Stewart said. Somewhat ironically, rating agency Standard & Poor's yesterday downgraded its AAA outlook on NAB to negative from stable. "Apart from emphasising the potential for higher-credit costs, the announcement highlights that NAB may face challenges in predicting future credit losses," said S&P credit analyst Sharad Jain.



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