The need for government support and guarantees for banks was sparked a fortnight ago by the Irish government when it guaranteed all deposits and loans in its six leading financial institutions, and then extended it to some foreign based groups operating in the republic.
The move was made after Depfa Bank, a subsidiary of Hypo Real Estate in Germany, came close to collapse when it couldn’t rill over billions of euros in short term loans: that forced two bailout attempts on the parent, the second at 50 billion euros, apparently settling the matter.
Much of that was the black hole in Depfa, which had also sold 30 billion in so-called covered bonds, which gives the buyer the right claim against the issuer’s balance sheet in the event of losses being incurred. The Irish banks have been big sellers of covered bonds to help finance the country’s now imploding housing boom which has dragged the entire economy into recession.
The UK and European proposals have steadied the situation everywhere but in Ireland where the banks remain fragile. The guarantee has done nothing to improve the situation, except stop it from worsening.
Allied Irish Banks plunged 41% in Friday’s terrible trading and yesterday, fell another 18% as Irish investors waited for news on a possible capital raising from it and other banks. They are looking to the Irish Government for leadership, but after taking the easy way out with the guarantee, there seems to be some hesitation.
Bank of Ireland was again weak, falling 4.5% yesterday, but Anglo Irish Bank rose 4% and other financial stocks were up by similar amounts, but nothing like the double digit rises seen in parts of Europe and the US.
It’s a telling irony that, while the guarantee helped steady the worries of depositors, it has done nothing for the banks themselves and their standing in the markets. The underlying concerns of those covered bonds, the tanking housing and building sector, falling demand and rising unemployment won’t be easily tackled or easily countered. There are no guarantees against the effects of a recession.
Meanwhile in the US Morgan Stanley was the star, surging 87% after its deal with the Japan’s Mitsubishi Bank was recast and then done (and no doubt hurting a few shorts and hedge funds in the process) the rest of the US baking sector wasn’t a strong performer. The banks and financials sub-index of the Standard & Poor’s 500 index only rose 4.5% on a day when the overall index was up close to 12%.
And much of the strength in the sub index came in the last half hour of trading as index and other funds were forced to buy in to catch the surge.
Shares of several major US banks, including JPMorgan Chase, Wells Fargo and U.S. Bancorp traded flat to lower for most of the day before gaining ground in the last half hour.
One US market strategist pointed out that these particular banks were all widely thought to be among the more conservative banks — i.e. the ones least at risk of a wholesale collapse. So investors chased the ones thought more at risk to get bigger price rises. Goldman Sachs and Citigroup had low double digit price rises.
After these same investors have spent the best part of the past month running to safe havens, what we saw in some US bank and financial stocks was a ‘flight to speculation”.
And there remains at least one trouble spot (besides the unresolved problems in Ireland).
Ukraine’s central bank overnight imposed emergency measures to stabilise the country’s fragile banking sector, which has been damaged by a loss of confidence, a plunging currency and a deepening political crisis with the third national election in as many years now underway.
The National Bank of Ukraine imposed a six-month freeze on the early withdrawal of deposits from commercial banks to prevent a run; it more than tripled its guarantee on deposits to $US38,000 and lifted reserve requirements for banks.
The central bank has already been forced to offer more than $US1 billion in emergency aid to ease liquidity and solvency problems at a handful of banks which have also had management replaced and state executives appointed, a a politically-inspired run on another bank.
Reports in the media suggest that many of the country’s 170 banks are experiencing liquidity problems.
Ukraine’s economy has in recent years been boosted by high world steel prices, the country’s main export, and a lending boom financed by heavy foreign borrowing by domestic banks. Falling steel prices and a widening current account deficit have put pressure on the currency, and the credit freeze has cut off credit.
There are echoes of Iceland’s predicament in the Ukraine’s position, but the latter’s banks never tried to recycle short term foreign loans into longer term offshore assets.
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