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10-08-08, 01:08 PM

Bank crisis builds pressure to mobilise dollar reserves

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<LI class=publication>Reuters
, Wednesday October 8 2008
By Mike Dolan
LONDON, Oct 8 (Reuters) - As the financial firestorm leaves the world's banks desperately short of U.S. dollars, the emergency may justify wholesale use of the $4.5 trillion of U.S. currency stashed in global central bank vaults.
Foreign exchange reserves are traditionally held for use in times of national economic emergencies and few now doubt that is exactly what faces countries around the globe needing to shore up and recapitalise chunks of their banking systems.
Drawing on massive dollar swap lines from the U.S. Federal Reserve -- lines recently doubled to central banks worldwide to more than $600 billion -- is one thing. Swaps are temporary and get unwound back to the Fed again.
But open-ended use of dollar reserves is quite another.
And one sizeable implication in using dollar reserves to ease the crisis is the impact it may have on U.S. Treasury securities -- where overseas central banks now park $1.7 trillion of their dollar windfalls -- at precisely the time when the United States needs to raise tens of billions of dollars of new debt.
"At some stage all measures have to be considered -- imaginative use of FX reserves in just one example of the sort of 'out of the box' thinking that is now necessary," said Jim O'Neill, chief global economist at Goldman Sachs.
On Tuesday, for example, the third biggest reserve holder Russia announced an extra $36 billion of long-term help for its banks -- over half of which will come from its central bank. Russia's gold and foreign exchange reserves have already dropped by some $25.6 billion last month alone to $556 billion in defence of the battered rouble.
South Korea, which has spent $25 billion of its foreign currency reserves in defence of its won exchange rate since March, also said this week it would give its ailing banks access to its $240 billion reserves -- the world's sixth largest.
South Korea's President Lee Myung-bak said on Wednesday that China, Japan and South Korea, having combined foreign exchange reserves in excess of $3 trillion, would not face a financial crisis similar to the one unfolding in Europe.
The debate in China about just how to use the firepower of its $1.8 trillion of reserves is raging. See [ID:nPEK13012]
And some analysts say the euro zone's banking crisis is at such a pitch that it may even be worth considering how the euro zone system of central banks -- which collectively holds $285 billion of FX reserves -- might best use its dollars too.
"One possible route out of this spiralling dollar shortage is for European governments to use foreign currency reserves to provide dollar capital directly to the banks," said Joe Prendergast, Investment Adviser at Credit Suisse in Zurich.
Prendergast said restrictions related to European monetary union rules may restrict use of euro zone dollar reserves but a possible solution would be to tap the reserve to offer banks direct dollar loans that could be repayable in euros.

A dollar shortage around the world has become the crux of the 15-month-old financial crunch because the near collapse of many U.S. mortgage-related assets has sent banks in Europe and elsewhere scrambling to find dollars to repair balance sheets. The International Monetary Fund on Tuesday increased its estimate of declared losses on U.S. dollar loans and securitized assets in this financial meltdown to $1.4 trillion, up almost half a trillion dollars from its estimate in April.
And it estimated that major global banks will need about $675 billion in additional capital over the next few years.
"Without the ability to obtain new capital from private markets, recapitalisation using the public sector balance sheet should now be considered," the IMF said.
But how did the dollar shortage snowball?
A simple example is that when a European bank takes a 50 percent writedown on a $2 billion asset, it still has to roll over $2 billion of short-term dollar financing all the way to maturity, even though the asset is then only worth $1 billion. The writedowns themselves fuel counterparty distrust on interbank lending markets and make rollover beyond overnight loans extremely difficult.
"European banks with large holdings of dollar assets were especially exposed," the IMF said on Tuesday, adding that they responded by raising more funds in euros, Japanese yen and British pounds and swapping them into dollars using foreign exchange and cross-currency swaps.
The strain this put on swaps markets led to the global central bank swap lines. Yet this didn't fully ease the problem.
A big problem, as Credit Suisse's Prendergast pointed out, is the writedowns created a currency mismatch on banks' books.
In the simplified example of a 50 percent writedown of a $2 billion asset, the notional European bank will end up with a $1 billion dollar net short position -- one its auditors will require it to cover by buying dollars to avoid the exposure.
As the dollar has surged about 15 percent against the euro since troughing in July, the euro size of the exposure has grown -- and the need to buy dollars to close that gap has merely accelerated its rally.
Hopes that all those pressures might abate as banks' third-quarter accounting ended last month have been already been replaced with gloom about fourth quarter refinancing needs -- further underlining dollar demand.
Credit Suisse said it expects European banks to face significant net redemptions of dollar debt through the final quarter -- with maturities of their U.S. dollar bonds particularly high in October. This must be met with dollar cash.
"Central bank intervention to sell dollars cannot be ruled out, in the event that the rush to hedge net dollar liabilities creates an increasingly disorderly FX market," said Prendergast.

Gee, I guess the US isn't paying 14% interest any time soon. tee hee!

10-08-08, 01:20 PM
Monetization time! :D

10-08-08, 01:20 PM
ahhh... that was fast!


U.S. Treasury to Sell More Debt to Address Shortages (Update1)

By Rebecca Christie
Oct. 8 (Bloomberg) -- The U.S. Treasury said it will sell more debt to meet demand for government securities and alleviate ``protracted shortages,'' said Karthik Ramanathan (http://search.bloomberg.com/search?q=Karthik+Ramanathan&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), the department's head of debt management.
The market disruptions are primarily affecting two-year notes through 30-year bonds, Ramanathan said in a statement released in Washington. The Treasury said it would sell $40 billion in reopenings of 10-year notes today and tomorrow, in four separate auctions of $10 billion each.
The four securities have maturity dates of Feb. 15, 2015; May 15, 2015; Aug. 15, 2015; and Feb. 15, 2018.
``To address upcoming borrowing needs and further enhance liquidity in the Treasury market, Treasury will reopen multiple securities which have created severe dislocations in the market, causing acute, protracted shortages,'' he said.
Treasury markets have been struggling with elevated numbers of transactions that don't settle properly, called failed trades or fails, in part because U.S. government securities have been in such high demand.
Ramanathan said the Treasury will monitor fails and encourage market participants to find ways to solve the problem.
``Private-sector participants should take additional steps from a monitoring and supervisory perspective to ensure that settlement fails do not reach levels that impact financing markets,'' he said.

You see, we can't launch the bailout until we raise cash, capice? We've got $40B now to do so... okay, gives us enough to keep running for another week or so.

Let's keep playing chicken with BRICOPEC and see who the bitch really is.

10-08-08, 04:43 PM
Russia to use oil wealth fund for bank loans-Kudrin (http://www.reuters.com/article/marketsNews/idUSL719651320081007)

Russia will use one of its oil wealth funds to fund 450 billion roubles ($17.19 billion) of the 950 billion rouble subordinate loans package for banks, Finance Minister Alexei Kudrin said on Tuesday.

The 450 billion "will come from one of the funds which we have," Kudrin said.

Russia's two oil wealth funds totalled $189.7 billion on Oct. 1.

10-08-08, 04:49 PM
Phirang -

Fascinating stuff. Could you unpack the full implications of this for iTulip readers? What parts of the below list do you accept as congruent to the treasuries market hints above, and to the extended shortage of USD, and what parts do you discard? Some of us have long been dismissive of the "synthetic dollar short unwind" - I don't yet fully grasp the complexity of the call on dollars that's occurring here, but evidently I was flat wrong on that.

What parts of the following do you see as corollaries, and what corollaries do you see additionally?

> Dollar results in an extended up-trend that can run for a surprisingly long time (years?) as this fully plays out, and severe market turmoil persists in foreign bourses and exchange rates?

> Gold up (likely moderately vs. USD but strongly vs. other currencies) in tandem with the dollar's rise, as monetization kicks in?

> Gold very strong for a basket of foreign currencies which are plummeting relative to the USD.

> USD ramping up on the strength of this unwind all the way to the 140's on the dollar index before it has all played out ?? :eek:

> "1998 effect" overtaking currencies and bourses worldwide, with the USD and US markets an island of relative stability during this highly "anomalous" period?

> Bond market approaches a multi-decade top (or has already crossed it) and it's bear market inverse correlation breaks down (this is not what you've implied here, but you've also called it elsewhere in macro terms as "likely soon").

> US stock markets go into extended rally? (this one can't be right?) :eek:

> Dollar short trade gets hammered down to a mere shadow of it's former self and disintegrates in the next 24 months?

Lots of highly actionable insights here. Care to unpack it's possibilities further? I think this uncovers critical potential trend changes - not all in line wth current iTulip projections?


I subscribe to Jack Crooks currency ETF's trader - he may just be right on this call after all.

Why the U.S. Dollar is Entering a Multi-Year Bull Market … and How You Can Play It

Oct. 3, 2008

Dear Subscriber,

Major stock indexes in the U.S. and abroad have experienced severe whiplash. Major commodity prices are feeling the effects of a serious hangover. Capital is fleeing emerging markets and risky assets. The U.S. dollar is cranking.

And you're positioned perfectly to ride out the storm that's wreaking havoc on so many investors' portfolios ... not to mention pull in profit all the while.

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10-08-08, 04:56 PM
Sorry, phirang, I read that the opposite way? There is no shortage of treasuries!

10-08-08, 07:45 PM
I don't get this. I've heard this before.

In a nutshell:

1. Banks pay the government to store all their money because they are scared shitless.

2. The government gives the money back to the banks as a bailout.

3. The Banks still shit scared give the money back to the government.

Rinse and repeat. Ping pong ping pong.

How are they going to stop people being scared shitless? They only way they can force lending is surely to nationalise the entire banking structure and force a new system on the banks forcing them to lend out to new rules that the government lays out.

I'm a layman, but that's the simple version as I see it. I don't understand half the terms itulipers talk about here.

When they nationalise the bank ala Gosbank, what will happen to the liabilities? Are they monetorized or vaporized? How will China be given the finger? Because surely the creditors have to be given the finger at some stage whatever they do. When globalisation is dissolved, can the government keep the system together or are we looking at anarchy?

That's what I'm not sure about at the moment.

10-10-08, 02:27 AM
Geez. The guy disappeared. "Lost in translation" ?

10-10-08, 03:36 AM
Could you unpack the full implications of this for iTulip readers?My simple minded take on this is as follows.

First of all, nevermind that various countries, currencies, crooks, congressmen and companies are involved.

We (us economically active humans on planet Earth) have a world financial system that currently stands atop U.S. Treasuries. Mind you, Treasuries are --not-- simply fiat Monopoly Money (Parker Brothers board game). Rather Treasuries are based on the monetized income stream from us good old American taxpayers. Treasuries are "good as gold" because the world's strongest economy for over the last half century pays interest on Treasuries from its tax collections.

Now we (economically active humans) have built a flaming house of cards of credit, debit and a**wipe paper atop these Treasuries, which is now in a big time old fashioned Panic. Actually it's kinda fun being able to see such a Panic up close and personal, while I have the means and ability to realize some of what's happening. But perhaps I say that because I sold all my stock, and my overpriced house in California, last year.

Anyhow, as with any panic in leveraged or less secure assets, the underlying asset becomes sought after, as the fallback. If the underlying "strong" currency is seashells, gold or Treasuries, it doesn't matter. When a bubble of overpriced or overleveraged or risky assets is built atop that strong currency, the strong currency becomes in great demand again when the bubble collapses, as people unwind their failed "investments" and hoard the strong currency.

It's time to trade in the Trash for Treasuries, and their more convenient, (very slightly) less profitable, alter egos, dollars.

10-12-08, 09:07 PM
Right, and where EJ's New Deal 2.0 comes in is in the following:

Treasury yields are too low, and making them high is unacceptable.

How best(i.e. cheaply) refinance the US? Create an "Infrastructure Bank" that is financed by foreigners and use those funds as a stimulus for the national economy.

Because the InfraBank bonds will be for solid assets: roads, traintracks, powerplants, etc, foreign holders won't demand an absurd yield.

It'll let the Fed focus on "fighting inflation", i.e. keeping yields low so they can finance the wars and other things necessary to expand USD seignorage and the aims of global-government, i.e. a single global currency, the dollar.

10-13-08, 01:50 AM
Right, and where EJ's New Deal 2.0 comes in is in the following:

Treasury yields are too low, and making them high is unacceptable.

How best(i.e. cheaply) refinance the US? Create an "Infrastructure Bank" that is financed by foreigners and use those funds as a stimulus for the national economy.

Because the InfraBank bonds will be for solid assets: roads, traintracks, powerplants, etc, foreign holders won't demand an absurd yield.

It'll let the Fed focus on "fighting inflation", i.e. keeping yields low so they can finance the wars and other things necessary to expand USD seignorage and the aims of global-government, i.e. a single global currency, the dollar.
Yup. IMHO , with minor variations, that's basically the plan for a the global scam.