Wednesday, February 13, 2008

At least the hangnail won't kill ya!

Whew! Macro Man sure is glad the whole credit crisis thingy is over. Now that Warren Buffet is on the scene, everything's gonna be just peachy, don'tcha think? That seemed to be the market reaction to Warren's revelation on CNBC that he is looking to reinsure all the munis currently covered by the unholy trinity of AMBAC, MBIA, and FGIC.

Indeed, the sentiment shift appeared to recall nothing so much as the old Mighty Mouse cartoons, with the Oracle of Omaha in the starring role. See if you can spot him in the clip below, bellowing in a surprisingly robust tenor "Here I coomeeee to saavvveee thee daaayyyyyyyy!"

Unfortunately, upon further reflection Warren is not, in fact, here to save the day. The muni market remains in pretty good shape with low default rates. So while Buffett's offer may head off some tail risk in that market, it shouldn't really do much to lift the prices, given that AAA muni yields are already pretty much at par with Treasuries.

No, the real distress is in structured-credit land, and Macro Man couldn't help but notice that Warren said nothing about bidding to reinsure the veritable Everest of structured credit turds which are currently stinking up financial markets. That's where the accidents have been, that's where the pain is, and that's a place that Mr. Buffett clearly (and justifiably) has no interest in stepping.

So far from saving the day, Warren's offer yesterday was the equivalent of a paramedic coming upon the victim of a horrific automobile accident and saying "Ooh! That hangnail looks really painful! Let me snip that off for you!" It might make a minor irritation feel better, but in the grand scheme of things it doesn't improve the lot of the victim very much at all.

Speaking of "not helping the victim", markets received further evidence this morning that helicopters cannot fly across the Atlantic. In a move forecast by precisely no one (or at least no one that provides forecasts to Bloomberg), Sweden's Riksbank tightened rates by 0.25%, citing high inflation and an erosion of inflation expectations. Gee, don't they know that there's a crisis going on? If their mindset is mirrored in the halls of Frankfurt, waiting for the "imminent" ECB rate cut could be like waiting for Godot....


FI Trader said...

Sweden def did the right thing. Look at the kronor and the sksw2.

Macro Man said...

Oh, I'm not suggesting they erred, more pointing out that the market seems to have assumed that justbecause Ben is playing around in his helicopter, all the other cnetral bankers will do so too. The Riksbank has provided a timely reminder that it just ain't so.

Bengt said...

Here in the frozen north we have stopped the credit crunch at our borders and deported all dodgy american stuff to that great country in the west (Norway).

No subprime in Swedish banks and riksbanken raising rates. All is well in the contrarian kingdom, or?

Macro Man said...

I suppose the question is, how much exposure have you got to the real ticking time bombs, e.g. Latvia, et al? One hears stories of Scandi banks throwing money at the Baltics left right and center, but I really do not know the truth. The stories are pretty scary though!

FI Trader said...

Yeah, that's true. There are massive problems in the baltics. Some swedish banks seem to beleive that this isnt subprimish, but of course it is.

bengt said...

True but we will keep our heads in the sand as long as possible :)

Sweden is down more than any other market from peak levels so I think it's fair to say we expect trouble to pop up eventually. How much we expect and how much we will get is of course the big question(s).

Charles Butler said...

I'm not sure that Warren's gonna save Torremolinos, but GE's sniffing around Spanish real estate developers.

Would any of your eastern European readers be able to post links to economic commentary on any or all of Poland, Hungary and Romania?

Thanks in advance.

Anonymous said...

fi trader, why do you think RB did the right thing. not sure i understand your argument by pointing at SEK or the 2-year SWAP. yeah they moved ...

Peter said...

charles butler:

try this..

a lot of their stuff is from sellside research but they also write their own - sometimes in depth - analysis
and you can always email them, they are quite happy to help. or at least, so I found

good luck


Macro Man said...

CB, you could also do worse than to check out the "Economy Matters" family of blogs run by Edward Hugh, Claus Visteen, et al.

CV said...

Thanks for the plug MM ...

I would say that the issued raised here are quite important. Now, me and Edward have been banging home on the risks in Eastern Europe not least because the links are quite strong to many continental European banks and because the issues in Eastern Europe fit quite nicely into our pet theoretical model of why 'demographics matter'. Now, whether this will end in misery is of course another question. It all depends on whether the banks are willing to keep the tap open and let their affiliates in the Baltics, Hungary, Romania etc follow these economies down in what inevitably is an incoming downturn. This would then be where the subprime issue rears its head since they might just be more inclined to cut their losses and write off these loans as it is.

This would be devastating for some eastern european countries since the vast part of the expansion has been driven by foreign credit and if suddenly this dissipates with a blink of an eye they won't be able to run their economies as is currently the case. I.e. we are then talking abour Dr. Doom et al. and how the Baltics may have to come off their Euro pegs etc. The alternative here would quite simply be impossible I think since the correction would have to come in the form of severe and prolonged deflation.

The big problem in the region from the point of view of macroeconomic(!) risks is the so-called translation risk. Quite simply, a lot of those consumer loans and mortgages are denominated in Euros and Swiss francs (Hungary and Romania). Now, this is of course fine as long as the peg is there but imagine rumours begin to mount that countries cannot defend the currency boards. Then my guess is that we will see some nasty developments.

Moreover, this is also why Hungary and Romania are at the forefron of all this since they are floating. The situation in Hungary is alarming since they are heading for a nasty slowdown with an interest rate of 7.5% and if the lower rates the Forint will tank and then those loans will be unpayable. Of course, the Forint may tank anyway but this hardly makes it better. Meanwhile, inflation is high leaving them with no chance whatsoever to export their way out of the debacle.

So yes, Eastern Europe forms a dangerous coctail at the moment and far from being certain that it will come to the ultimate crash and burn scenario it is likely to get ugly in some countries. And then, we have that illusive concept of contaigon to boot if we believe that what happens in one country will affect another. I have no idea really whether this will go. We are seeing a regionwide slowdown now which is good. The problem is if it turns into a very rapid de-acceleration.

As for your question CB, me and Edward have written extensively about this. this is a good starting place.

As for whether the Riksbank erred or not. Well this is fascinating thing about this environment I think in the sense that the CBs cannot seem to make up their mind whether to worry about inflation or growth the problem being that they can't worry about both at the same time. (well they could just stay pat and do nothing I guess :))


pupkinus said...


try this

there are also links to other interesting digests on the right side.

I think that the prospects for Eastern Europe are grim. A rel estate bubble, huge population debt, 50% of the debt is in foreign currencies... all the components for a little bust.

Just a small comparison:
before '98 crisis Thailand's deficit of trade balance measured as % of GDP was 7,9% (in 96 I guess)

Romania (don't have the exact figures at hand) is above 10%
Latvia today - around 25%.

I've been told that the IMF considers a reading above 5% - a sign of systematic trouble. Of course IMF's advice is often worth to be ignored but here I concur with IMF opinion.

best regards,

ps: anyone has a explanation for the FTSE rebound after the initial drop today? I was expecting some more downside.

Anonymous said...

re: the Riksbank - look at reaction of rate mkts to today's decision! More tightening now => more easing later.

vlade said...

cv: is there anything like this (the article on Hungary) on Poland/Slovakia/CZ?

Charles Butler said...

Thanks to all (I'm not actually buying anything, Peter).

pupkinus -- 'no news is good news' is a pretty good theory.

Anonymous said...

i think a more accurate analogy for the buffet offer is a paramedic coming on a big accident and thinking: great pickings for transplants here!

Macro Man said...

...or perhaps putting the band-aid on the hangnail and presenting the victim with a bill for $1000.

CV said...

@ Vlade ...

Well, Edward and I do have a Poland Economy Watch which aggregates economic news on Poland. In general, I would say however that Bloomberg's Eastern Europe section and then this are quite good.

fi trader said...

[at] Anonymous

Well, I just happened to be long gamma on the swap.

More in general, I believe the riksbank's major concern should be keeping a strong and stable currency, and with inflation ex. high, I liked the move. If I look around, prices on almost everything I buy regulary are skyrocketing.

What is yout take?