Myth & Reality
12 / Oct / 2008
Another week of fear, turmoil, desperation and panic stalked markets, individuals and governments alike. For once our Government looks is if it has raised its game and is prepared to think creatively and with purpose. The Chancellors plan to swap liquidity for equity to re-capitalise our clearing banks taken together with the guarantee covering inter-bank lending should encourage credit to flow once again. RBS, HBOS and Lloyds TSB fell into the Governments plan as equity stakes of approximately £37bln were announced this morning. The US Treasury Secretary, Hank Paulson, is looking closely at the same concept and may offer something similar to Wall Street.
The illegal action by the Icelandic authorities to pull down their banks because restructuring them may prove a little painful caused wide spread distress. This is a State with only EUR1.5billion in external debt and as recently as April pledged to take any action to defend its economy from the short-sellers. More worryingly, the announcement that the 3rd biggest bank had taken EUR600million in return for a 75% equity stake from the Government proved to be false. The initial story broke on Sept 28th but last Wednesday the Reykjavik paper Morgunbladid broke the news that the transaction was never completed. In essence it appears that the three banks were liquid, had little asset impairment and no US rubbish but Reykjavik decided that an exclusively “Iceland first” policy was the easiest option. Cue an inspired reaction from Number 10 – use anti-terrorist legislation to keep assets of the UK arm of their largest bank, Kaupthing, in the UK. Whatever Haarde may perceive is in Iceland’s best interest, unless the next 3 generations want a pure herring and mutton diet he will have no choice but to accept external funding from whatever source if only to repay plundered depositors in full.
On Wednesday, Central Banks of the major economies, in fear of a crushing incipient recession, loosened monetary policy across the globe – to no effect. Market rates are still as high as ever and we feel that UK rates will not move until the Chancellor’s plan is passed and enacted in full. As ever, economic figures and statistics have absolutely no relevance in a market predominated by fear, myth and inaccurate media coverage.