CLSA India

ICICI Bk & SBI fail to Roll-over Offshore Inter-Bank Loans It is increasingly clear to GREED & fear that the prevalent practice by Western governments of guaranteeing bank deposits and bank bonds is having very unfortunate consequences for those emerging market banking systems where governments are less willing to engage in such panicky policy making. Thus, GREED & fear heard in India last week that ICICI and SBI were recently not able to roll over their offshore interbank loans because their bonds have not yet been formally guaranteed by the Indian government. Similarly, it has to be wondered whether the apparent freeze in trade finance, in terms of the unwillingness to extend funding against letters of credit, is being caused or at least aggravated by a similar insidious regular arbitrage. This is, of course, why these blanket guarantees are so dangerous even as the supposedly responsible establishment media continue to defend such action on the pathetic argument that governments have no other option. What should be happening, of course, is that bad banks should be allowed to fail meaning that deposit flows would surge to the good banks, thereby awarding them for good behaviour. If this is clearly not happening, as the grotesque “Northern Rock” example shows, it does not mean that the “guarantee” policy is without risk. For the more the guarantees extend, the more depositors might wonder if the guarantees mean anything. This can be seen by assessing total bank liabilities in a country compared with the same country’s GDP. Iceland is the well known disaster story, whose bank liabilities are nearly nine times its GDP. This compares with six times in Switzerland and 1.1x in America. But there are plenty of other examples where it would not be so easy to honour the guarantee. Such a spectacle of a run on the global banking system may sound far fetched. But it is the direction in which the world is heading if governments persist in this stampede to guarantee. Such blanket guarantees do not represent tough political decision making. Rather they represent the easy way out, consistent with the complete lack of discipline associated with the current US dollar paper standard. To state the obvious, this paper standard continues to live on borrowed time. The now serious, and so far more worth watching, CNBC showed an interesting chart on Wednesday. This was the percentage decline in US financial stocks since it was announced that these stocks were getting taxpayer funding under the Troubled Asset Relief Program (see Figure 8). GREED & fear cannot imagine a more condemning indictment of TARP which clearly remains, to put it kindly, a programme in a high degree of flux For now GREED & fear’s hoped for relief counter-trend rally is clearly not happening. One explanation must be the complete lack of clarity about what TARP is meant to be. The desire for a new administration with a “fresh” approach is almost palpable. Mortgage relief is likely to be a priority. GREED & fear heard one proposal this week where qualifying applicant would receive a US$ 30,000 downpay check freebie and a 30-year mortgage from the Federal Housing Finance Agency (FHFA) fixed at 3.99%. With an average home price estimated at around US$ 180,000 that could clear 2.5m homes or one quarter of the 10m inventory of foreclosed homes.Whatever the exact details of the final policies implemented, this is likely to be the direction in which policy is heading. Finally, despite growing evidence of a thaw in the credit markets, GREED & fear has to admit that short-term Treasury bill yields remain ultra low reflecting continuing extreme risk aversion. Thus, the US three-month Treasury bill now yields only 0.15% (see Figure 9). In this sense America is already Japan.