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Monday, July 28, 2008

A Crunchier Credit Crunch

The IMF has released its most recent global financial stability report and the findings aren't all that pretty. Despite the desire and predictions of so many analysts and talking media heads to have reached some sort of bottom to the current crisis (and their likewise willful disbelief in favor of such a rosy outlook), the credit crisis has yet to reach its peak. According to the BBC:
The global credit crunch shows no signs of abating, according to the International Monetary Fund (IMF).

In its latest global financial stability report, the IMF says that falling house prices and slowing economic growth are hitting credit.

It warns that banks are under renewed stress, and further cutbacks in bank lending could deepen the slowdown.

The IMF also says that emerging markets like China may also suffer more pain in the future from the credit crunch....

...In April, the IMF said that banks and other financial institutions could lose $1 trillion (£503bn) from the credit crisis as mortgage-backed assets lost most of their value - and it is still sticking to that estimate.

The current report says that that the banks have now acknowledged these risks and written off nearly $500bn worth of assets.

But it points out that they have only been able to raise new capital to cover about two-thirds of those losses, so the likelihood is that they will have to restrict their lending further.

The IMF warns that "as banks seek to deleverage and economise on capital, assets are being sold and lending conditions tightened, resulting in slower credit growth in the US and the euro area."

In the US, private sector borrowing has dropped to the lowest level since the 2001 recession.

And there is now less scope for central banks to cut interest rates to boost economic growth because of the higher risk of inflation.
We're already seeing the effects of this reality, with skittish banks cutting back big time on making new business loans. From the NY Times:
Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”

Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.
You don't need a weatherman to know which way the wind blows from here. More job cuts, less expansion, continued depreciation in the housing markets as credit becomes harder and harder to acquire, leading to more homes languishing on the market, spurring further depreciation.....in short, negative momentum.

Plus, when you consider that the Fed and its global counterparts are hamstrung now in their ability to lower interest rates for fear of increasing an already rising inflationary rate, and knowing that deficit spending on the part of the government often leads to accelerated inflation, news like this is not welcome in the least:
A senior administration official said Monday the federal budget deficit for this year will set a record high approaching $490 billion.

The official said the deficit was being driven to record levels by the sagging economy and the stimulus payments being made to 130 million households in an effort to keep the country from falling into a deep recession. A deficit approaching $490 billion would easily surpass the record deficit of $413 billion set in 2004.
Nope. Not welcome at all. Hold on to your hats.

Our long national hangover is just beginning.

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