economic situation is dire

[leviramsey]

From this week's Barron's "Current Yield" column (must be a subscriber to view online)

Bailouts Threaten Nations' Debt Ratings

The incoming Obama administration got a rude reception from the debt markets.

Ed Yardeni, who coined the term "bond vigilantes" back in the early 'Eighties, sees them being roused again. Then, the vigilantes' main target was inflation; now it's the burgeoning budget deficits around the globe.

The eponymous head of Yardeni Research notes that the Congressional Budget Office is projecting a fiscal 2009 budget deficit of $1.2 trillion -- 8% of US GDP. And that's before President Obama's $800 billion stimulus plan. The CBO also accounts for the discounted present value of TARP returns, which brings its cost down to $180 billion this year from the likely $700 billion cash outlay.

Taking all that into account, Goldman Sachs estimates that the Treasury's cash borrowing needs may hit $2.5 trillion this year. Against this backdrop, incoming Treasury secretary Timothy Geithner threw down the gauntlet to America's biggest creditor, China, accusing it of currency manipulation.

Little wonder that long-term Treasury yields have been moving up, while the cost of insuring US government debt in the credit-default swaps market has widened sharply, back to their largest levels reached in December. The benchmark 10-year note moved back above 2.50% last week, to 2.62%, an increase of 30 basis points (30/100ths of a percentage point) from last Friday.

That's resulted in a marked steepening of the Treasury yield curve. The spread between the two- and 10-year notes has jumped to 182 basis points, about a 50 basis-point increase since the year began, as long yields moved up while the short end has been anchored by the Fed's target of 0-0.25% for the federal funds rate.

Policymakers may address this at this week's meeting of the Federal Open Market Committee. Chairman Ben Bernanke has talked of buying longer Treasuries to cap longer-term interest rates, and the Fed has already begun buying agency mortgage-backed securities.

Whether purchases of longer maturities would quell the market's concern is another question. Thursday, CDS on US Treasuries were quoted at 73 basis points, according to Tim Backshall, chief strategist at Credit Derivatives Research. That means paying 73,000 euros annually to insure 10 million euros of US debt. Obviously Uncle Sam can reel off all the greenbacks he needs to pay off his debt. So the CDS on US Treasuries are quoted in euros, a currency the US can't print.

That's up sharply from 60 basis points a week earlier and 40 basis points on Nov. 20, when the S&P 500 hit its recent low. The stock market's gain apparently has come at a cost to Uncle Sam, as the first half of the TARP was exhausted and the second half was requested in the waning days of the Bush administration.

James F. Keegan, chief investment officer of Seix Investment Managers and a portfolio manager of the Ridgeworth Intermediate Bond Fund, puts it bluntly: "The government's massive efforts to bail out the banks are putting the sovereign credit of the US at risk."

This sort of risk rippled through the global government bond markets. Bond vigilantes are exacting increased yields -- not because of expectations of high inflation, but precisely the opposite. Amid worsening debt deflation and recessions in Britain and the rest of Europe, governments there also face enormous fiscal deficits, in part to bail out their faltering banks.

Nowhere has the international vote of no-confidence been stronger than in the UK, where it's been evidenced by the pound's stunning collapse. Sterling has plunged since the global financial crisis intensified late last summer, to below $1.40 from over $2.00 as the tab for the UK government's bailout has soared. The cost of insuring British government debt has soared. Credit default swaps on UK debt were quoted Wednesday at 148 basis points by Markit.com, up 33 basis points in just a week, though they tightened slightly on Thursday (one basis point is the equivalent to a premium of $1,000 annually to insure $10 million of debt for five years).

"Countries don't go broke," declared the late Walter Wriston, a former CEO of the banking company that nowadays calls itself Citigroup. That was the early 1980s, just before that era's Latin American loan crisis erupted.

But when global capital flees a nation's currency and government securities, the bedrock of its financial system, the world has expressed doubts about that country's ability to meet its liabilities.

Ironically, even as investors flee the rising risks of government debt, they are flocking to junk bonds. Junk funds saw a $3 billion burst of inflows in 2009's first three weeks. And issuers have taken advantage of this new enthusiasm for junk by issuing a like amount of new speculative-grade paper this month, according to S&P.

[ianrobo1]

are these the same agencies who rated the toxic loans AAA+ ?

[snowychap]

Barclays letter causes share jump

Shares in Barclays have jumped by more than 60% after the bank wrote an open letter to reassure investors of its continuing good health.

In the joint letter, chairman Marcus Agius and chief executive John Varley said the bank would report a 2008 profit "well ahead" of market targets.

They said annual profit would be higher than £5.3bn, despite £8bn of gross write-downs at its investment bank.

Like most banks, Barclays has seen its shares fall heavily recently.

"In view of the events in the banking sector last week, we have decided to communicate now with employees, customers, clients and shareholders," said Mr Aguis and Mr Varley.

"These figures demonstrate that, although we have been heavily impacted by the credit crunch, our income generation was at a record level in 2008 and has enabled us to withstand this impact and still produce strong profits."

In the past two weeks, Barclays's shares fell by more than two-thirds on worries that the bank would have to raise more capital to cope with write-downs triggered by the global economic slowdown.

However, the letter triggered a dramatic rebound in Barclays shares, and in late-morning trade they were up 33.2 pence, or 65%, at 84.4p.

Other bank shares also rose, with Lloyds Banking Group up 23% at 60.8p and Royal Bank of Scotland 15% higher at 14p.

'Well funded'

In November last year, Barclays secured £7bn of private funds, mainly from Middle Eastern investors.

The letter from Mr Agius and Mr Varley said that the bank's capital resources were "well in excess of regulatory requirements".

"We are well funded and we are profitable," it said.

The bank chiefs reiterated that Barclays would not be seeking any financial support from the government.

Barclays will now be publishing its full-year results on 9 February.

It said its profits had been lifted by its £1bn purchase of core assets of US investment bank Lehman Brothers, which was announced in September.

Barclays bought Lehman's North American investment banking and trading unit, in addition to the firm's New York headquarters and two data centres.

Barclays added it had already made a "good start" to 2009.

Exerpt from Robert Peston's blog:

It's slightly odd that the penny should at last have dropped for investors - that if Barclays says it's profitable and doesn't need to raise new capital, then that's to be believed.

For a bank to have to give this reassurance in the form of an open letter from the chairman and chief executive is highly unusual. And the message they delivered wasn't new.

The bank has been shouting that it's in reasonable nick for 10 days, ever since the steep slide in its share price began.

Only belatedly have investors realised that Barclays could not make such confident statements without the approval of its auditors and also that of the City watchdog, the Financial Services Authority - and that surely they can't all be wrong.

Though, on This Week last Thursday (link which may only be temporarily available as it's the iplayer - about 32 mins), Will Hutton said:

...Barclays Bank say they're going to make £5.5 billion pounds - more than they did last year despite every other investment bank in the world (and they're very big in investment banking - Barclays) have lost a lot of money.

Well, y'know, that may be true. What's going to happen in 2009?

And people are saying in the markets, the kind of structured investment vehicles that Barclays have got are fine, now, but when corporates start getting into trouble in 2009 will be less fine and that will be when they [barclays] get into trouble....

[ianrobo1]

some peopel made have made a killing out of this ...

[TheSufferingVilla]

The Housing Market has and always will be the bane of civilisation. This belief in many societies that you are nobody unless you own your own property. So you spend your whole life working like a dog to pay a bank 3-4 times the worth of the property you are buying and by the time you finally own the decrepid mound of concrete and wood you find yourself about to expire from the long miserable life you spent working to afford your dream of owning your own home. Then to make matters worse you are sent to a nursing home to live your final days under somebody elses roof while your miserable spawn squabble over the best way to sell and divide the property you slaved for.

[tonyh29]

Then to make matters worse you are sent to a nursing home to live your final days under somebody elses roof while your miserable spawn squabble over the best way to sell and divide the property you slaved for.

over here you would have to sell it to pay for the nursing care so at least the family don't have to squabble

[tonyh29]

What next for gordon ? Rumour has it the budget will be delayed so he can try and ride on the coat tails of anyhting that Obama does in America ..

The Tories are the most trusted party on the economy, according to the latest poll.

Asked who they trust most on the economy - the Prime Minister and Alistair Darling, or David Cameron and George Osborne - voters now give the Conservatives a two point lead.

TheICM survey for the Guardian also found that 64% of voters believe the Government's strategy to combat the downturn will have no effect, or will even make things worse.

There is much opposition towards Gordon Brown's decision to purchase large stakes in Britain's banks (only 43% back it), however 63% of the public approve of the drop in VAT and 85% think a new programme of public works is a good idea.

Overall support for the Conservatives has increased by six points since last month, to 44%.

Labour is down one point at - 32% - and the Lib Dems have dropped three to 16%

[ianrobo1]

There is much opposition towards Gordon Brown's decision to purchase large stakes in Britain's banks (only 43% back it),

do these people realise thje consequences if the government had not done this ??

actually there is no reall poltical opposyion to these moves because if it had not been doe, HBOS and RBS would have gone tits up

maybe they should have been allowed to but do peopel serouly want a depression ?

[ianrobo1]

The Housing Market has and always will be the bane of civilisation. This belief in many societies that you are nobody unless you own your own property. So you spend your whole life working like a dog to pay a bank 3-4 times the worth of the property you are buying and by the time you finally own the decrepid mound of concrete and wood you find yourself about to expire from the long miserable life you spent working to afford your dream of owning your own home. Then to make matters worse you are sent to a nursing home to live your final days under somebody elses roof while your miserable spawn squabble over the best way to sell and divide the property you slaved for.

woul not surprise you that I totally agree on this and you have summed it up brilliantly, if I knew I coul get a cheaper rented house on a long term lease (say 10 years for security) I would sell my place now. Problem is whilst renting is on comparable prices as a mortgage (well for me) there is simply no incentive to rent

I will be 55 when my mortgage is paid off, great ...

[ianrobo1]

Then to make matters worse you are sent to a nursing home to live your final days under somebody elses roof while your miserable spawn squabble over the best way to sell and divide the property you slaved for.

over here you would have to sell it to pay for the nursing care so at least the family don't have to squabble

differet debate and a very interesting one on who should pay and fund the massive costs in respite care when the family does not care enough to look after one of their own

but that is for another thread

[tinker]

IMHO Housing market was over hyped by greedy bankers, greedy house owners and stupid purchasers. When the average UK wage is around £30,000, How can a basic 3 bed semi be worth £200,000? over 6 x the average wage, the market was always liable to fail. The housing boom was fed by greedy bankers willing to lend high risk loans that had no relationship to the borrowers ability or means to pay back the money outside of perfect market conditions.

The banks/ Surveyors should never have valued properties at such high values. Mortgages would not have been given and then house prices would have remained at a sensible sustainable level. But greed from all corners kicked in. The banks made money on the massive mortgages and the house holder made money from inflated prices. Just like a massive ponzi scheme.

The real worry is the people who are now waiting/ encouraging the market to regain its strength and the prices start to increase, before they sell. Should be a very long wait but I have my doubts and suspect the government have become accustomed to the over inflated housing market generating massive amounts of revenue.

Have a nice day and UTV (on a brighter note, Heskey 'will' score tonight)

[Gringo]

There is much opposition towards Gordon Brown....

I think the brown bounce is definitely over. The economic commentators are beginning to look more at his past economic record and criticize the past more than his current actions. I think they have bored of been told this is all america's fault and some are now examining in more detail the current state of UK Plc. His appearance of radio 4 last week was very poor - as mentioned in the indie yesterday. He didn't answer questions just kept on repeating the mantra. Last friday (before the interview) the indie were saying:

So there will have to be fiscal retrenchment within the next couple of years, with cuts in public spending and probably high taxes. Maybe this can be delayed until some sort of recovery is under way in 2010, but it will make the early part of the next expansion a pretty muted period, and I am afraid things will get worse before they get better. And the prime reason for that, as the exchanges recognise, will have been fiscal mismanagement on a monumental scale.

Going to be a lot more bad opinion polls, a lot more criticism and no chance of an election before april 2010.

[ianrobo1]

there never was Gringo and all of is knows what will happen after this is over

from a poltival point of view though do you see any alternatives that other parties (all over the world) are saying that would be any different or makes thinsg better ?

[tonyh29]

when the family does not care enough to look after one of their own

as you say another thread but it's not as black and white as you try and make it appear ... if an elderly relative needs 24 hour medical care then they simple cannot live at home

[ianrobo1]

when the family does not care enough to look after one of their own

as you say another thread but it's not as black and white as you try and make it appear ... if an elederly relative needs 24 hour medical care then they simple cannot live at home

of course not but you would admit a lot can be looked after at home ...

it is difficult and the costs are enormous and will only get worse

[Gringo]

there never was Gringo and all of is knows what will happen after this is over

from a poltival point of view though do you see any alternatives that other parties (all over the world) are saying that would be any different or makes thinsg better ?

My post was related to the public view of brown's past record and the fact that the people and the media are increasingly tiring of the 'global phenonemen', 'started in usa', 'do nothing party' mantras trotted out after every challenge.

The Prime Minister is within his rights to point out that this recession is a global phenomenon triggered by a worldwide banking crisis. Mr Brown is also perfectly correct in pointing out Britain’s last two recessions, under Conservative administrations, of course, were caused by domestic factors that those governments either fanned or failed to control.

However, none of that excuses Mr Brown from his share of the blame for that banking crisis. Why doesn’t he just admit that, in retrospect at least, it would have been sensible for policymakers to be more interventionist on financial regulation over the past 10 years or so?

The claims made yesterday by the Prime Minister, that he called for better financial regulation 10 years ago, just make him look silly. Does Mr Brown now say he has spent a long and lonely decade campaigning for reforms that irresponsible colleagues around the world denied him? And if he honestly did see the need for more regulation, why on earth didn’t he do something about it? Perhaps then he really might have saved the world. clicky

[drat01]

However, none of that excuses Mr Brown from his share of the blame for that banking crisis. Why doesn’t he just admit that, in retrospect at least, it would have been sensible for policymakers to be more interventionist on financial regulation over the past 10 years or so?

Can you imagine the outcry if that had happened? I love this wonderful hindsight that some have magically pulled from a secret store. These same people were bemoaning Gvmt intervention and are now saying that is what was needed.

Again a lot of the comments are down to personality attacks rather than offering alternative solutions. It's pathetic really and symptomatic of a lot of what is wrong in this country

[ianrobo1]

Ian is right Gringo, you know and are astutue enough to know that if the government had took more regulations the city would have screamed, the Tories would have decyed the amount of red tape and Labour would have been accused of 'micro managing' the economy they could not win.

However now is the time that regulations can be put into place and the bankers can not squeal, I hope the opporuntiy is taken both sides of the atlantic

[tonyh29]

I love this wonderful hindsight that some have magically pulled from a secret store

I was working for an investment bank at that time .... Brown was determined to take out what he saw as the old-boy network of the city ..so he created a big, shiny, new, regulator body drawing up regulatory codes and setting targets . He decided to soup up the Security and Investments Board, established in the mid-1980s to bring a greater degree of external regulation, and called it the Financial Services Authority. It took over regulation of the banks and mixed it in with consumer protection, fighting fraud.In effect , Brown founded a pseudo-regulator, taught it to do nothing except fret about 'consumer issues' and one thing it seems to have been poor at was keeping an eye on British banks and their lending and investment policies

The scale of the failure of Gordon Brown's regulatory model was so vast it will end up being seen as one of the worst aspects of his discredited time in the Treasury.

Again a lot of the comments are down to personality attacks ......

remind the board again your views on Cameron , Osborne , Johnson etc

[drat01]

remind the board again your views on Cameron , Osborne , Johnson etc

Odious people who play the game of personal attack as their main form of justification for election. Simple really Tony

Why do you miss the point?

I was working for an investment bank at that time .... Brown was determined to take out what he saw as the old-boy network of the city ..so he created a big, shiny, new, regulator body drawing up regulatory codes and setting targets . He decided to soup up the Security and Investments Board, established in the mid-1980s to bring a greater degree of external regulation, and called it the Financial Services Authority. It took over regulation of the banks and mixed it in with consumer protection, fighting fraud.In effect , Brown founded a pseudo-regulator, taught it to do nothing except fret about 'consumer issues' and one thing it seems to have been poor at was keeping an eye on British banks and their lending and investment policies

The scale of the failure of Gordon Brown's regulatory model was so vast it will end up being seen as one of the worst aspects of his discredited time in the Treasury.

Amazing then that so many others, who are now claiming to be experts, never said anything about this model nor did anything about it. Amazing that they happily reaped in the millions but are now claiming it was flawed. Amazing that they were happy to moan about any sort of intervention and now are claiming that not enough was done.

Hindsight is amazing, maybe if (god forbid) the Tory party ever got into power they would show us where these vast quantities are and we can start selling it - sure fire way of making money I would have thought